international paper company Intellectual property is benefiting from strong demand for corrugated and corrugated board packaging, fluff pulp and the growth of e-commerce. The benefits of price realization across all segments of the company and the expected contribution from Building a Better IP initiatives will offset higher costs and support margins.
History of positive results: International Paper, a Zacks No. 3 (Hold) company, has a trailing four-quarter earnings surprise of 7.3%, on average.
Positive growth projections: The company’s profit estimate for the current year is $4.76, suggesting 48.7% year-over-year growth.
Solid financial position: The company’s efforts to reduce its level of debt seem encouraging. International Paper’s total debt has fallen from $11 billion at the end of 2016 to $5.6 billion at the end of 2021. The company’s total debt-to-equity ratio has declined significantly over the past few years and stood at 0.38 as of March 31, 2022. Its ratio multiplied by interest earned was 4.4. The company has limited short-term maturities, with about $900 million due over the next five years.
The benefits of strong price realization through price increases are helping International Paper counter higher input and energy, chemical and distribution costs. This will help the company support its margins in the coming quarters. The company expects margins in its segments to increase in the second quarter, with further expansion in the second half as price realization outpaces rising input costs. The company had the highest maintenance outage quarter of the year, expecting to complete 70% of its planned maintenance in the first half of the year.
IP is committed to generating an additional $350-400 million in net income by the end of 2024. These include approximately $300 million in cost reduction initiatives and $50 million in dollars from trade and investment initiatives.
International Paper forecasts EBITDA to be between $3.1 billion and $3.4 billion in 2022, compared to $2.6 billion in 2021. The company made a profit of $40 million from Building a Better initiatives IP in the first quarter of 2022 and is on track to achieve the incremental gross profit target of $200-225 million in 2022.
IP continues to witness strong demand for corrugated and containerboard packaging in its industrial packaging segment, as it plays a vital role in the supply chain bringing essential products to consumers. . Its demand for e-commerce remains strong. A favorable supply-demand context for fluff pulp is boosting the global cellulose fiber segment.
Last October, International Paper completed the spin-off of the printing papers segment into a stand-alone, publicly traded company, Sylvamo SLVM. IP received a $1.4 billion payment from Sylvamo. The company retained up to 19.9% of the shares of the new company. In Q1 2022, the company monetized approximately half of its investment with proceeds of $144 million, reducing the company’s stake to approximately 10.5%. This spin-off will allow International Paper to focus on its industrial packaging segment and capitalize on the growing demand for corrugated packaging, reduce costs and improve profits. It also supports the company’s goal of streamlining and simplifying its organization to form a packaging-focused business.
International Paper expects chemical, energy and distribution costs to remain elevated in the second quarter of 2022. Significant rail, road and sea transportation congestion due to harsh shipping conditions will continue at short term.
International Paper shares have lost 6.4% over the past six months, versus 10.3% for the sector.
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Actions to Consider
Some top-ranked stocks in the base materials space are Allegheny Technologies Inc. ATI and Nutrien Ltd. NTR, each shows a Zacks rank #1 (Strong Buy), at present. You can see the full list of today’s Zacks #1 Rank stocks here.
Allegheny forecasts a profit growth rate of 869.2% for the current year. The Zacks consensus estimate for ATI’s earnings for the current year has been revised up 27.3% in the past 60 days.
Allegheny’s earnings have exceeded Zacks’ consensus estimate in each of the past four quarters. It has a surprise on earnings for the last four quarters of about 128.9% on average. ATI gained about 15.6% in one year.
Nutrien forecasts a profit growth rate of 163.2% for the current year. The Zacks consensus estimate for NTR’s current-year earnings has been revised up 27.5% in the past 60 days.
Nutrien’s earnings have exceeded the Zacks consensus estimate in three of the past four quarters, averaging 5.8%. NTR gained 42.9% in one year.
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