We are maintaining our Neutral recommendation on
) given integration risks associated with the Temple-Inland merger,
margin headwinds and high debt levels. Currently, the stock retains
a Zacks #3 Rank, implying a short-term Hold rating.
Looking at the second quarter numbers, International Paper
reported EPS of 46 cents, sailing past the Zacks Consensus
Estimate, but revenues of $7.1 billion failed to beat. Within
segments, a 27.5% increase in revenues in the Industrial Packaging
segment was a saving grace as it helped offset declines in the
Printing Papers, Consumer Packaging and Xpedx segments.
Mergers and acquisitions remains International Paper's key
strategy to strengthen its businesses over the long term. The
acquisition of Texas-based Temple-Inland is its largest since it
) corrugated-packaging business for $6 billion in August 2008. The
company generated $60 million in synergies to date.
The transaction is expected to be accretive to EPS within one
year of closing and incrementally beyond 2013. The combination will
yield synergies of $240 million in the first year and $400 million
by the end of 2013, derived largely from operations, freight,
logistics, selling expense and overheads. Moreover, the combination
will strengthen the packaging business of North America by
increasing its share in the corrugated packaging market to 34% from
the current level of 27%.
The International Paper Ilim joint venture in Russia has been
growing rapidly. It is currently working on two major projects,
which are expected be completed by 2012 end - modernization and
expansion of a pulp mill in Bratsk and a new paper machine at
Koriatza mill in Russia. These represent a combined $1 billion of
investment and are expected to generate over 20% returns.
In China, the International Paper-Sun joint venture is building
a new consumer paperboard line that should come online in late
2012. Going forward, these initiatives will contribute to both
earnings and cash flow immensely.
International Paper is working toward transforming and improving
the profitability of its distribution business, Xpedx. Improvements
are expected in procurement, replenishment of orders, reduced stock
keeping units (SKU) and supply chain (including fewer/larger
warehouses). We believe that these initiatives will boost results
and be accretive to EPS going forward.
On the flipside, International Paper's debt levels remain high,
further aggravated by the Temple-Inland acquisition.
Debt-to-capitalization ratio was 62.9% as of June 30, 2012,
compared with 62.2% as of March 31, 2012, and 59.9% as of December
Given the magnitude of the Temple-Inland deal, integration risks
continue to be a concern. In addition, International Paper's
failure to realize synergies from the acquisition could negatively
impact the company's earnings.
Furthermore, under its consent decree with the Department of
Justice, International Paper had to divest 970,000 tons of
container board capacity. Even though the company maintains its
synergy targets, this has reduced some of the positives from the
acquisition and adversely benefited its peers.
Rising energy, chemical and OCC costs remain headwinds. Margins
will also be affected by the startup costs from the aforementioned
investments in Ilim and Sun projects, higher interest expense due
to debt issued for the Temple-Inland acquisition.
Memphis, Tennessee-based International Paper is a global paper
and packaging company with operations in North America, Europe,
Latin America, Russia, Asia and North Africa. International Paper
conducts its businesses through five segments: Printing Papers,
Industrial Packaging, Consumer Packaging, Distribution (Xpedx) and
Forest Products. International Paper competes with
) and Weyerhaeuser Co.
INTL PAPER (IP): Free Stock Analysis Report
MEADWESTVACO CP (MWV): Free Stock Analysis
WEYERHAEUSER CO (WY): Free Stock Analysis
To read this article on Zacks.com click here.