On Aug 18, 2020, we issued an updated research report on International Paper Company IP. The company continues to gain from strong demand for corrugated packaging and e-commerce activities in the wake of the coronavirus pandemic. A strong balance sheet and acquisitions also bode well. However, weak demand for printing paper and decline in commercial printing remain concerns.
Mixed Q2 Results
International Paper’s second-quarter 2020 adjusted earnings of 77 cents per share was down 33% year over year. However, the bottom line outpaced the Zacks Consensus Estimate of 38 cents. Net sales declined to $4,866 million in the second quarter from the year-ago quarter’s $5,667 million and missed the Zacks Consensus Estimate of $5,124 million.
Factors Likely to Impact Q3 Results
For third-quarter 2020, the company expects price and mix to be down $25 million in the industrial packaging segment due to the flow through of prior index movements in North America. Operations and costs are anticipated to be negatively impacted by increasing costs associated with the Riverdale mill start-up and higher seasonal costs in the North American box business. Volume is expected to be stable compared with the second quarter, while input costs are anticipated to be lower driven by lesser recovered fiber costs.
In global cellulose fibers segment, volume is expected to be sequentially lower in third-quarter 2020 due to lower seasonal demand and inventory destocking. Operations and costs are anticipated to affect earnings due to higher expected unabsorbed fixed costs. Increased input costs, driven by higher energy and chemical costs will also dent the segment’s earnings.
In the Printing Papers business, price and mix is likely to be down in the third quarter, primarily due to export channels. While volume is expected to improve, resurgence in coronavirus cases might cut the recovery short. Operations and costs are anticipated to improve on better fixed cost absorption, while input costs are expected to remain stable.
Overall, in the third quarter, maintenance outages are expected to be around $174 million, sequentially higher by $100 million. Notably, maintenance outage is expected to be at the highest in the third quarter.
E-Commerce to Fuel Results, Demand for Printing Paper Ails
The company is witnessing strong demand driven by processed food, beverage, proteins, chemicals, paper tissue and towel. The company will continue to benefit from growing e-commerce demand as it has become a primary spending channel for customers. Further, corrugated packaging plays a critical role in supply chain to bring essential products to consumers. The Global cellulose fibers segment will gain on demand for absorbent hygiene products and tissue products.
However, the pandemic has affected paper consumption in schools, offices and businesses due to stay-at-home measures. The company has also experienced unprecedented decline in commercial printing segments owing to the significant pullback in print advertising. This will weigh on the Printing Paper segment’s performance in the near term.
Strong Balance Sheet: A Positive
The company’s efforts to reduce debt levels appear encouraging. International Paper’s total debt has gone down from $11 billion at the end of 2016 to $9.47 billion as of Jun 30, 2020. Its total debt to total capital ratio is at 0.58, lower than the industry’s 0.81. The company’s times interest earned ratio of 3.3 compares favorably with the industry’s negative 3.8. Through the first half of 2020, International Paper generated $1.5 billion of cash from operations and $1 billion of free cash flow aided by strong commercial and operational performance, and cost management actions. As of Jun 30, 2020, the company had $3.6 billion of liquidity.
M&A Activity Remains a Key Catalyst
Mergers and acquisitions are a key strategy for International Paper to strengthen its packaging business. In May 2020, the company increased its ownership interest in a sheet feeder with a strong box plant network in North America. This investment enables the company to expand sales through the channel by 140,000 tons annually by providing a broad range of containerboard solutions. It has also decided to increase capital investments in its North American box system by about $60 million this year to enhance capabilities and converting capacity to support growing customer segments and geographies.
The company has raised its full-year capital expenditure target to $800 million. This increase is primarily due to the company’s plan of funding strategic projects with returns of more than 20% in the North American Industrial packaging business.
Price Performance
International Paper’s shares have declined 6.2% over the past year against the industry’s growth of 0.6%.
Zacks Rank & Stocks to Consider
International Paper currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the basic materials space include Golden Star Resources Ltd. GSS, Eldorado Gold Corporation EGO and Yamana Gold Inc. AUY, each carrying a Zacks Rank #2 (Buy) currently. You can see the complete list of today’s Zacks #1 Rank stocks here.
Golden Star Resources has an estimated earnings growth rate of 12.5% for 2020. The company’s shares have surged 88.4% in a year’s time.
Eldorado Gold has an expected earnings growth rate of 2,225% for the current year. Its shares have appreciated 38.8% in the past year.
Yamana has a projected earnings growth rate of 76.9% for the ongoing year. The company’s shares have soared 91.8% over the past year.
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.
See these 7 breakthrough stocks now>>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Zacks Investment Research
