We reiterate our Neutral rating on International Paper Co. (IP), a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper’s fourth quarter EPS of 68 cents and fiscal 2010 EPS of $2.05 more than doubled from the prior-year results and comfortably beat the respective Zacks Consensus Estimates.
Revenues of $6.5 billion were ahead of the Zacks Consensus Estimate of $6.4 billion. Revenues increased 9% year over year, driven by growth across all of its segments. For fiscal 2010, revenues increased 8% to $25.2 billion and were above the Zacks Consensus Estimate of $25 billion.
Last year marked a transition for International Paper with the highest fourth-quarter EPS in over ten years and fiscal 2010 EPS more than doubling that of 2009.
The improvement was attributed to higher price realizations, volume recovery, better operations and a significantly higher contribution from its Ilim joint venture in Russia. Aggressive cost management has been the key in improving International Paper’s results and will continue to be part of the company’s strategy going forward.
Further, International Paper tripled its existing Asian operation with the acquisition of Svenska Cellulosa Aktiebolaget Group’s (SCA) Asian packaging arm for $206 million. The combined sales will be $350 million, more than three times the current International Paper’s $100 million.
Assuming improving demand for corrugated products, the company aims to grow revenues to $800 million by utilizing current idled capacity without any additional capital investment. With this acquisition, International Paper expands into the growing Chinese packaging market with high-quality assets at a much cheaper price, compared with the cost that the company would have incurred to build these facilities from scratch.
Furthermore, it saves the company the time it would have taken to build that capacity, which is estimated to be around five years.
In 2010 and early January 2011, International Paper had twice hiked its annual dividend, from $0.10 to $0.75. This would reinvigorate investor optimism as the company had slashed its dividend by 90% to $0.10 in March 2009 in an effort to preserve cash during the severe economic downturn.
International Paper also completed its land monetization program in 2010, receiving cash of $160 million on closing, with the balance of $39 million, plus interest, to be received in three years. The land sale also bolstered the company’s cash position.
We expect International Paper to continue utilizing its sound cash flow by investing in capital projects, indulging in acquisitions, reducing its total debt and returning a greater proportion of cash to shareholders through increased dividends.
However, its high debt levels and underfunded pension liability remain concerns as it curbs the company’s ability to ramp up its capital expenditure.
Furthermore, International Paper’s first quarter has traditionally been slow and the quarter’s results are expected to be slightly lower than the fourth quarter of 2010, with stable volumes, prices and operations offset by rising input costs. Input costs (particularly fiber, energy and chemicals) are expected to be steeper. We thus maintain our Neutral recommendation backed by a short term Zacks #3 Rank (Hold).
Memphis, Tennessee-based International Paper Company is a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper conducts its business through five segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution (Xpedx) and Forest Products. International Paper competes with MeadWestvaco Corporation (MWV) and Weyerhaeuser Co. (WY).
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