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International Paper Co. (IP - Analyst Report) reported fourth quarter adjusted EPS of 66 cents, a 3% drop from the prior-year quarter but outperforming the Zacks Consensus Estimate of 61 cents. After including special items EPS in the quarter stood at 59 cents compared with 73 cents in the prior year quarter.

Net sales were $6.37 billion, versus $6.53 billion during the year-ago quarter, missing the Zacks Consensus Estimate of $6.46 billion.

Cost and Margins

Adjusted cost of goods sold amounted to $4.66 billion, a 3% decrease from $4.79 billion during the year-earlier quarter. Selling and administrative expenses, improved 17% to $441 million. Adjusted operating income increased 4% to $601 million from $580 million in the prior-year quarter.

Segmental Performance

Industrial Packaging: Sales for this segment decreased 2% to $2.5 billion. Adjusted operating income increased 15% to $316 million.

Printing Papers: Sales increased a marginal 1% to $1.55 billion compared to the year-earlier quarter. The segment’s adjusted operating income dipped 19% to $190 million from the year ago quarter.

Consumer Packaging: Sales increased 3% to $905 million from $880 million in the year-earlier quarter. Adjusted operating profit was $62 million in the quarter versus $64 million in the year ago quarter.

Xpedx (Distribution Business): Sales for the segment dropped to $1.62 billion from $1.77 billion in the year-ago quarter. However, operating income of this segment increased a whopping 267% to $33 million.

Fiscal 2011 Performance

In fiscal 2011, adjusted EPS was $3.10 compared with $2.05 in the prior year and the Zacks Consensus Estimate of $3.07. After including special items, EPS in the quarter stood at $3.07 compared with $1.48 in fiscal 2010. Net sales were $26.03 billion, up 3% from $25.2 billion in the prior year but missing the Zacks Consensus Estimate of $26.14 billion.

Financial Position

Cash and cash equivalents of the company were $3.994 billion as of fiscal 2011 end comoared with $2.073 billion as of fiscal 2010 end. Cash flow from operating activities improved substantially to $2.67 billion during the year compared with $1.63 billion in 2010. As of December 31, 2011, the debt-to-capitalization ratio was 59.9% compared with 55.9% as of December 31, 2011.

Performance Of Competitors

International Paper competes with MeadWestvaco Corporation (MWV - Analyst Report) and Weyerhaeuser Co. (WY - Analyst Report). MeadWestvaco reported EPS of 26 cents in the fourth quarter of fiscal 2011 compared with 41 cents in the prior year quarter. Adjusted earnings fell short of the Zacks Consensus Estimate of 29 cents per share. For fiscal 2011, adjusted EPS was $1.92 compared with $1.54 in 2010, short of the Zacks Consensus Estimate of $1.95 per share. Weyerhaeuser is yet to release its third quarter earnings.

Our Take

The company continues with its merger and acquisition strategy to strengthen its businesses. The merger with Temple-Inland will increase its share of the North American corrugated-packaging market from 27% to 40% and will be accretive to EPS in the first year. International Paper's acquisition of a 75% stake in Andhra Pradesh Paper Mills will help capitalize on the burgeoning demand for paper and packaging products in India.

Furthermore, through its joint ventures, International Paper has significant projects underway in Russia and China. These will help the company sustain its earnings growth. We expect International Paper to continue utilizing its sound cash flow by investing in capital projects, acquisitions and reducing its total debt. The shares of International Paper currently retain a Zacks #2 Rank (short-term Buy rating).

Memphis, Tennessee-based International Paper Company is a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper conducts its business through five segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution (Xpedx) and Forest Products.

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