We maintain our Neutral recommendation on
). The quantitative Zacks #3 Rank (short-term Hold rating) for the
company indicates no clear directional pressure on the shares over
the near term
While International Paper's first quarter 2012 earnings per
share (EPS) of 57 cents sailed past the Zacks Consensus Estimate,
revenues of $6.6 billion failed to meet the concensus.
Mergers and acquisitions continue to be International Paper's
key strategy to strengthen its businesses for the long term. Its
acquisition of Texas-based Temple-Inland is its largest since the
August 2008 acquisition of Weyerhaeuser Co.'s
corrugated-packaging business for $6 billion. The company generated
$10 million in synergies in the first partial quarter of ownership.
The transaction is expected to be accretive to EPS within one year
of closing and incrementally beyond 2013. The combination will
fortify the North American packaging business by increasing its
share in the corrugated packaging market to 34% from the current
The company also completed the acquisition of a majority stake
in a leading Indian paper company, Andhra Pradesh Paper Mills
Limited. This transaction made International Paper the first global
paper and packaging company to have a significant presence in
India's growing paper and packaging industries.
Furthermore, the International Paper Ilim joint venture in
Russia has been growing rapidly. It is currently working on two
major projects which should be complete by 2012 end. A pulp mill is
being modernized, upgraded and expanded in Bratsk, which will be
the closest and lowest-delivered-cost softwood pulp mill to China.
A new paper machine at Koriatza mill in Russia will be added as the
Russian market is growing at about 6% a year. These represent a
combined $1 billion of investment and International Paper is
expecting over 20% in returns.
In China, the International Paper-Sun joint venture is building
a new consumer paperboard line that should come online late in
2012. These initiatives will contribute to both earnings and cash
flow substantially, going forward.
International Paper is working towards transforming and
improving the profitability of its distribution business, xpedx.
Improvements are expected in procurement, replenishment of orders,
reduced stock keeping units (SKU), and the 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. The
debt-to-capitalization ratio increased to 62.2% as of March 31,
2012 from 59.9% as of December 31, 2011.
Given the magnitude of the 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 has 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.
Furthermore, 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 Temple-Inland acquisition,
increase in maintenance expense, higher pension expense and a
higher tax rate.
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
INTL PAPER (IP): Free Stock Analysis Report
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