“We are maintaining our BUY rating on Focus List selection International Paper Co. (IP – yield 3.20%) with a target price of $36. IP posted substantial year-over-year earnings growth in 1Q11, and continues to benefit from increased demand and volume. We expect that stronger industry fundamentals, coupled with the company’s recent price hikes and restructuring efforts, will enable it to post solid earnings throughout 2011.
“On April 28, International Paper reported 1Q11 net income from continuing operations (and before special items) of $322 million or $0.74 per diluted share, compared to $16 million or $0.04 per diluted share in the year-ago quarter. EPS exceeded our projection of $0.63 and the consensus estimate of $0.59. By operating segment, Printing Papers posted an operating profit of $209 million, compared with $126 million in the first quarter of 2010. Segment results benefited from favorable pulp and paper pricing, reduced fixed costs, fewer mill outages, and increased shipments in the U.S., Europe, and Brazil. In the Industrial Packaging segment, operating profit rose to $274 million in 1Q11 from $46 million in 1Q10, reflecting price increases for boxes and linerboard, fewer mill outages, and reduced input costs.
“Consumer Packaging posted an operating profit of $101 million, up from $31 million last year. The results reflected higher market demand, higher volumes, further realization of past price increases, and stronger profits in the foodservice business. Xpedx, the company’s distribution business, reported an operating profit of $12 million, down from $21 million in 1Q10. The decrease was primarily due to one-time costs associated with the company’s exit from certain retail and printing equipment businesses and lower overall sales volumes. Finally, as mentioned in our last report, the Forest Products segment, which completed the sale of all its timberland acreage in 4Q10, is no longer reported as a separate business segment.
Earnings and Growth Analysis
“We are raising our above-consensus 2011 diluted EPS estimate to $2.96 from $2.77 based on our forecast for continued strong demand, volume growth, and pricing strength this year. In addition, we are raising our above-consensus 2012 estimate to $3.37 from $3.25. Our estimates reflect continued top-line growth, margin expansion, and cost containment. Our long-term growth rate projection is 6%.
“We believe that IP’s decision to focus on the two business platforms in which it has competitive advantages, uncoated papers and industrial and consumer packaging, was the correct path. Assuming further global economic recovery, we also believe that IP will continue to leverage its geographically diverse revenue base to generate stronger earnings and cash flow ...
Financial Strength & Dividend
“International Paper recently announced an increase in its quarterly dividend from $0.1875 to $0.2625 per share, for a projected yield of about 3.5%—the highest in the Forest & Paper Products sector. The first payment at the new rate will be made on June 15 and will be the third dividend increase in the past twelve months. Our dividend estimates are $0.98 for 2011 and $1.05 for 2012. The company has a $3 billion share buyback program, originally authorized in July 2007, but has not repurchased stock in recent quarters.
“Investors in International Paper face a range of risks. In addition to the industry-wide issues of competition, operational efficiency, environmental compliance and potential litigation, the firm has significant debt. Pulp and paper prices can also be highly volatile.
“International Paper is trading at 10.3-times our 2011 EPS estimate and at 9.0-times our 2012 forecast, below the low end of the 17-year average annual range of 21-45 and the multiples of close competitors. In addition, the stock’s price/sales, price/cash flow and price/EBITDA multiples are below the low end of their historical average range. The company’s financial results and earnings outlook have improved significantly in recent quarters, and we expect IP to generate continued strong results going forward. Our target price of $36 implies a modest multiple of 10.7-times our 2012 EPS estimate, still below the low end of the historical average range.”
Bill Selesky, Argus Weekly Staff Report, May 9, 2011