Bull of the Day:International Paper (IP)


April 05, 2013 |

This paper and packaging company has been increasing its revenues, generating solid cash flows and rewarding the shareholders with growing dividends.

Further, with improving outlook for the industry, this Zacks Rank #1 (Strong Buy) stock looks very attractive as of now.

About the Company

Headquartered in Memphis, Tennessee, International Paper is a global leader in the paper and packaging industry with manufacturing operations in North America, Europe, Latin America, Asia and North Africa.

International Paper conducts its businesses through four segments—the Industrial Packaging segment, the Printing Papers segment, the Distribution segment and the Consumer Packaging segment.

Impressive Fourth Quarter Results

IP reported fourth quarter 2012 operating earnings of $0.69 per share versus $0.73 per share in the year-ago quarter, beating the Zacks Consensus Estimate by 5 cents.

For full year 2012, operating earnings for 2012 were $2.65 per share compared $3.12 per share in the prior year, handily beating the Zacks Consensus Estimate of $2.44 per share.

IP reported a healthy increase in quarterly sales, primarily attributable to the Temple-Inland acquisition. The company achieved Temple-Inland synergy run rate of $360 million per year—almost one year ahead of schedule. The acquisition is likely to be increasingly accretive to earnings going forward.

The company recently increased its dividend by 14%. This was the third dividend increase since November 2010. With increasing free cash flow generation (up about three times since 2005), we expect the company to continue to reward the shareholders with growing dividends and share buybacks going forward.

As a result of excellent cash generation, the company will also be in a position to reduce its debt; they have already repaid $1.9 billion in debt after the Temple-Inland acquisition.

IP will release its first quarter earnings on May 2. 2013.

Positive Earnings Estimates Revisions and Rating Upgrades

As a result of excellent earnings and updated guidance, four analysts have increased their estimates for June 2013 quarter and the fiscal year 2013. Zacks consensus estimates for the current quarter, next quarter and the current year now stand at $0.72, $0.84 and $3.82 per share, respectively.

The company has also received multiple broker rating upgrades in the past few weeks.

Improving Outlook

Containerboard industry outlook seems to be improving after recent consolidation, which is likely to result in improved pricing.

Recently a big hedge fund--Senator Investment Group reported that they own over 23 million shares of stock (up from less than 5 million shares at the end of 2012). This stock now represents a very large holding for the hedge fund.

The Bottom Line

IP is a Zacks Rank#1 (Strong Buy) stock. It also has a longer-term Zacks recommendation of “Outperform”. Zacks Industry rank of 105 out of 265 indicates the likelihood of continued strength in the short to medium term, compared to other industries.

Further with a dividend yield of 2.6%, excellent fundaments and a solid growth potential, I believe that this stock will be a nice addition to any portfolio.

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