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Reasons to Hold International Paper Stock in Your Portfolio

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International Paper (IP - Free Report) is poised 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. Weak demand for printing paper and decline in commercial printing will weigh on the top line.

International Paper currently carries a Zacks Rank #3 (Hold). It has a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

International Paper’s shares have fallen 4.0% over the past year, compared with the industry’s decline of 4.7%.

Better-Than-Expected Q2 Earnings

On Jul 30, 2020, International Paper reported second-quarter 2020 adjusted earnings of 77 cents per share, which outpaced the Zacks Consensus Estimate of 38 cents.

Positive Earnings Surprise History

International Paper has an impressive earnings surprise history. It beat estimates in each of the trailing four quarters, the average surprise being 37.8%.

Estimate Revision Activity

The Zacks Consensus Estimate for third-quarter earnings has been revised upward by 14% to 48 cents over the past 60 days. The Zacks Conensus Estimate for fiscal 2020 has moved north by 19% over the past 60 days to $2.49.

Superior Return on Assets

International Paper currently has a Return on Assets (ROA) of 4.2%, higher than the industry’s 2.7%. An above-average ROA denotes that the company is generating earnings by effectively managing its assets.

Growth Drivers in Place

Pandemic Driven Demand: 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 owing to restrictions amid the coronavirus pandemic. Further, corrugated packaging plays a critical role in supply chain to bring essential products to consumers. Moreover, the Global cellulose fibers segment is riding on strong consumer demand for absorbent hygiene products and tissue products triggered by the pandemic.

Focus on Core Business: International Paper continually evaluates its operations for improvement opportunities by focusing on core businesses, realigning capacity to operate fewer facilities with the same revenue capability, closing high cost facilities, and trimming costs. The company has strategically offloaded businesses in China to focus more on its U.S. operations. International Paper also divested consumer packaging business in North America. The company intends to invest significantly to improve its North American containerboard mill system, enhance product quality, and reduce manufacturing and delivery costs. It has entered into an agreement to sell its Brazilian Industrial Packaging, which is expected to close in the second half of 2020.

M&A Strategy: Mergers and acquisitions remain a key strategy for International Paper to strengthen its packaging business. In North America, the company envisions a large opportunity within its industrial packaging businesses, which continue to generate best margins in the industry. The company is taking initiatives to drive further margin expansion over time across the business. The company has raised 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.

Strong Liquidity: The company's efforts to reduce debt levels also 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. Management has taken various actions to strengthen the company’s liquidity position that include entering into a $750 million revolving credit agreement and amending the receivable securitization program from uncommitted to committed financing.

Headwinds to Counter

The coronavirus outbreak has affected paper consumption in schools, offices and businesses due to stay-at-home measures implemented to stem the spread of the coronavirus. This will weigh on the company’s results. The company has also experienced unprecedented decline in commercial printing segments due to the significant pullback in print advertising. Further, the transition to digital media has led to declines in demand for paper and remains a persistent woe.

Bottom Line

Investors might want to hold on to the stock, at present, as it has ample prospects for outperforming peers in the near future.

Some better-ranked stocks in the basic materials space include Kinross Gold Corporation (KGC - Free Report) , Eldorado Gold Corporation (EGO - Free Report) and Yamana Gold Inc. (AUY - Free Report) , each carrying a Zacks Rank #2 currently.

Kinross has an expected earnings growth rate of 100% for the current year. The company’s shares have surged 71.7% over the past year.

Eldorado Gold has an anticipated earnings growth rate of 2.33% for the ongoing year. Its shares have rallied 14.5% in the past year.

Yamana has an estimated earnings growth rate of 76.9% for 2020. The stock has soared 73.6% in the past year.

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