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We reiterate our Neutral recommendation on International Paper Co. (IP - Analyst Report),  which is a global paper and packaging company with operations in North America, Europe, Latin America and Asia.

International Paper released its financial results on July 28, 2011 for the second quarter of 2011. The company reported net earnings of 80 cents per share compared with 42 cents in the prior-year quarter. Net sales were $6.6 billion and operating income was $483 million versus $6.1 billion and $353 million respectively a year ago.

The company continues with mergers and acquisitions to strengthen its business for the long-term. Recently, the company finalized a deal to acquire Texas-based Temple-Inland in order to serve the North American container board market. International Paper also expanded its Asian operation with the acquisition of Svenska Cellulosa Aktiebolaget Group’s (SCA) Asian packaging arm for $206 million.

International Paper also signed a deal with AGI World of Atlas Holdings to form AGI-Shorewood, which will make it a global leader in specialty packaging solutions. The consolidation of two leading businesses will cater to the needs of premier consumer product, media and entertainment and tobacco companies providing them with innovation, efficiency and outstanding services.

In addition, the Printing Paper business offers huge opportunities going forward, encouraging International Paper to intensively focus on this business. The main drivers of growth for the global printing paper industry are a growing population, improving living standards, rising advertising expenditure, increased multi-color printing, growing demand for high-quality magazines and office papers, along with modernization of the paper industry and printing industry.

However, rising competition is a major concern for International Paper. Potential growth opportunities in the paper and packaging industries are attracting new firms to enter the industry and luring existing firms from other industries to diversify their business into this industry. Some of the leading firms in the business include Weyerhaeuser Co. ((WY - Analyst Report)),  MeadWestvaco Corporation ((MWV - Analyst Report)) and RockTenn CP, LLC.

Another big threat is increasing input costs (particularly fiber, energy and chemicals) which raised the company’s cost of goods sold by 6.2% year over year to $9.51 billion and selling and administrative expenses by 8.5% to $969 million.  

The shares of International Paper hold a Zacks #3 Rank in the short term, which translates into a “Hold” rating.

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