International Paper Company IP looks promising at the moment, backed by favorable demand trends across all its segments, restructuring initiatives, investment in high-return capital projects, and mergers and acquisitions.
Recently, the company reported first-quarter 2019 results. Adjusted earnings in the quarter were $1.11 per share, improving 18% from the prior year. The bottom-line figure also outpaced the Zacks Consensus Estimate. Net sales improved to $5,643 million in the quarter from $5,621 million recorded in the year-ago quarter.
The stock has gained around 9.4% year to date, outperforming the industry’s growth of 8.0%.
Below, we briefly discuss few other factors that make the stock worth holding on to.
Underpriced: Looking at the trailing 12 month Enterprise Value to EBITDA ratio, International Paper’s shares are underpriced at the current level. The company has a trailing EV/EBITDA ratio of 5.2, which is below the industry average of 6.0.
Positive Earnings Surprise History: International Paper has an impressive earnings surprise history. It outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering an average positive earnings surprise of 9.94%.
Upbeat 2019 Guidance: The company guides adjusted EBITDA to lie between $4.2 billion and $4.3 billion in 2019. In the North American Industrial Packaging business, box demand remains solid, aided by e-commerce and produce. The momentum will continue in 2019 as well. Further, the company’s focus to serve the rapidly-growing segments will be an important contributor to the strong performance. Its concerted efforts to align with the customers will also aid the company’s performance.
In Europe, benefits of the Madrid mill will accelerate through the year. In the Global Cellulose Fibers business, global pulp demand remains strong and demand in the fluff segment continues to grow. Product introductions in the fluff pulp segment and its optimization initiatives are likely to drive the company’s performance. In the Printing Papers segment, improved global demand will bolster segment revenues.
Other Growth Drivers: International Paper is undergoing restructuring initiatives to transform itself into a core packaging company. The company has strategically offloaded businesses in China to focus more on its U.S. operations. It has also completed the divestiture of its consumer packaging business in North America. Further, International Paper intends to invest significantly to improve its North American container-board mill system, enhance product quality, and reduce manufacturing and delivery costs.
Moreover, International Paper aims to utilize its sound cash flow by investing in high-return capital projects, reducing total debt and returning greater proportion of cash to shareholders through increased dividend payouts and share repurchases. These projects are expected to have a collective internal rate of return of 20%.
International Paper has a long-term earnings growth rate of 5%.
Favorable Rank, Score Combination: International Paper carries a Zacks Rank #3 (Hold) and a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum. The company’s score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, make solid investment choices.
Return on Equity (ROE): International Paper’s trailing 12-month ROE of 31.3% reinforces its growth potential. The company’s ROE is higher than the ROE of 18.8% for the industry, highlighting its efficiency in utilizing shareholders’ funds.
International Paper Company Price and Consensus
International Paper Company price-consensus-chart | International Paper Company Quote
Stocks to Consider
A few better-ranked stocks in the Basic Materials space are Israel Chemicals Ltd. ICL, Arconic Inc. ARNC and Arch Coal Inc. ARCH. These three stocks currently carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Israel Chemicals has an expected earnings growth rate of 13.51% for 2019. The company’s shares have gained 16.9% in the past year.
Arconic has an estimated earnings growth rate of 3.5% for the current year. The company’s shares have appreciated 20.8% in a year’s time.
Arch Coal has a projected earnings growth rate of 5.49% for 2019. Its shares have rallied 17.6% over the past year.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Israel Chemicals Shs (ICL) : Free Stock Analysis Report
Arch Coal Inc. (ARCH) : Free Stock Analysis Report
Arconic Inc. (ARNC) : Free Stock Analysis Report
International Paper Company (IP) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research