Company Overview: International Paper Company (NYSE: IP) is a global producer of renewable fiber-based packaging, pulp, and paper with manufacturing operations in North America, Latin America, Europe, North Africa, and Europe. Industrial Packaging, Global Cellulose Fibers, and Printing Papers are the company's three operating segments.

IP Details

Key Takeaways from Q3FY21 (ended September 30, 2021)

• Boost in Topline: The company's net sales in Q3FY21 were USD 5.71 billion, an increase of 11.54% from USD 5.12 billion in Q3FY20.
• Rise in Bottomline: In Q3FY21, the company's net income climbed to USD 864 million from USD 204 million in Q3FY20, resulting in a diluted EPS of USD 2.20.
• Cash & Debt Position: In Q3FY21, IP decreased debt by USD 235 million and returned USD 411 million to shareholders in the form of USD 199 million in dividends and USD 212 million in share repurchases.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• IP announced on December 15, 2021, that it would construct a state-of-the-art corrugated packaging plant in Atglen, Pennsylvania. It expects the factory to be fully operational in Q1FY23, with construction starting in Q1FY22.
• On December 3, 2021, IP stated that the Science Based Targets Initiative (SBTi) had authorized a 35% reduction in greenhouse gas emissions, which is in line with the levels required to satisfy the Paris Agreement's targets.
• The business priced its cash tender offer for up to USD 500 million in aggregate principal amount of outstanding notes on November 12, 2021.
• On October 1, 2021, IP completed the spin-off of its Printing Papers segment to Sylvamo Corporation (NYSE: SLVM), a publicly-traded corporation. As part of the spin-off, IP stockholders got one share in SLVM for every eleven shares held in IP.

Steady Dividends:

• On January 11, 2022, the company declared a quarterly dividend of USD 0.4625 per common share on the common stock, par value USD 1.00, inclusive from January 1, 2022, to March 31, 2022. It will be payable on March 15, 2022, to shareholders of record on February 18, 2022. Over the last four years, the company has regularly paid dividends, as also reflected in the chart below (every D represents a dividend payment):

Balance Sheet & Liquidity Position

• Surge in Cash Balance: The company had total cash and cash equivalents of USD 2.12 billion at the end of Q3FY21, a considerable increase from USD 0.60 million at the end of FY20.
• Cashflow from Operations: IP witnessed a decrease in operating cash inflows to USD 1.92 billion during 9MFY21 from USD 2.27 billion during 9MFY20.
• Reduction in Debt: At the end of Q3FY21, IP reported total outstanding debt of USD 8.47 billion, down from USD 8.70 billion as of September 30, 2020.

Key Metrics: In Q3FY21, IP's operating and net margins were 15.2% and 13.5%, higher than the industry median of 10.6% and 6.4%, respectively. ROE stood at 9.6% in Q3FY21 from 5.4% in Q2FY21. Debt/Equity was 0.88x as of September 30, 2021, lower than 1.23x on September 30, 2020.

Profitability and Leverage Profile; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 45.49% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and T. Rowe Price Associates, Inc. hold the maximum stake in the company at 11.80% and 11.59%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Input Price Risk: IP's production process necessitates substantial inputs such as raw wood fiber and energy sources such as natural gas, electricity, and fuel oil, all of which have fluctuating and unpredictable pricing. As a result, any delay in obtaining the required amount of unfavourable pricing could cause the company's overall performance to be distorted.
• Cyclical Industry: The business is in the container and packaging industry, subject to economic cyclicality and shifting consumer tastes. These factors may lower demand for the company's products and, as a result, the average selling price (ASP).
• Competition Risk: IP is in direct competition with domestic and international players. As a result, its financials may be harmed by competitors' enhanced product development, operational efficiencies, and pricing strategies.
• Weather Risk: Climate change and local weather conditions could impact the company's and its suppliers' operating success.

Outlook

• Looking ahead, IP anticipates improved price realizations in the Industrial Packaging segment in Q4FY21, while Cellulose Fibers will remain constant in price and product mix. Industrial Packaging is likely to see strong seasonal demand, with snubbed volumes in the Cellulose Fibers category predicted due to port congestion.
• The company expects increased maintenance outages between USD 3 and 37 million in the coming quarter in Industrial Packaging and Cellulose Fibers, respectively.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: IP's share price has adjusted 16.92% over six months. The stock is currently leaning towards the lower end of its 52-week range of USD 43.87 to USD 61.80. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a discount compared to its peer's average, considering the risks involving input price volatility, the impact of climate change, and the dependence on economic cyclicality. We have taken peers like Amcor PLC (NYSE: AMCR) and Packaging Corporation of America (NYSE: PKG). Considering the solid topline performance, robust profitability margins, steady dividend yield, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 48.34, down 0.37% as of January 12, 2022, 12:16 PM ET.

IP Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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