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International Paper (IP) Down 12% in 6 Months: Will It Recover?

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Shares of International Paper Company (IP - Free Report) have lost 12.1% in the past six months, reflecting a decline in volumes witnessed by the company in the past few quarters. IP has, however, fared better than the industry it belongs to, which witnessed a 17% fall in the same timeframe.

Weak Volumes & Low Pricing Ail IP

International Paper has been witnessing weak demand as current inflationary pressures have been impacting consumers, leading to lower demand for goods. This had a large impact on packaging demand, as consumer priorities have shifted towards non-discretionary goods and services. Also, International Papers’ customers and the broader retail channel have been trying to lower their elevated inventories, which further impacted the demand.

In fiscal 2022, the company had reported a 5.7% decline in sales volumes in the Industrial Packaging segment and 2.6% lower volumes in the Global Cellulose Fibers segment. This continued in the first quarter of 2023, with volumes in the Industrial Packaging and Global Cellulose Fibers segments declining 10.2% and 3.4%, respectively.  This downtrend in volumes along with lower prices and high costs impacted the segments’ margins in the first quarter of 2023.

International Paper has a market capitalization of around $11 billion. It currently carries a Zacks Rank #3 (Hold). Let’s discuss the factors that indicate that the stock might stage a comeback.


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Expected Pick up in Volumes

The company stated that the customer feedback suggests that the majority of destocking will be completed in the second quarter of 2023. Also, volumes in both Industrial Packaging and the Global Cellulose Fibers segments are expected to pick up in the second quarter due to seasonal factors. The same is  expected to pick up in the remaining quarters of 2023, as the situation normalizes.

 The company will gain on solid demand for corrugated and containerboard packaging going forward as it plays a critical role in the supply chain to bring essential products to consumers. This will aid the Industrial Paper segment’s results. The Global cellulose fibers segment will gain on the demand for absorbent personal care products.

Costs Headwinds to Lessen

IP, which had so far been impacted by higher-than-expected costs for chemicals, energy and distribution, stated that it now expects these costs to assume normal levels. The company now expects lower energy, fiber and freight to contribute to earnings growth henceforth.

Expected Savings from Initiatives

International Paper achieved $250 million in earnings through Building a Better IP initiatives in 2022, exceeding the target of $200-$225 million in gross incremental earnings. The company has realized $65 million of year-over-year incremental earnings improvement in the first quarter of 2023 and expects the total contribution to be in the range of $125 million to $150 million in 2023.

Ongoing Investments to Aid Growth

The company's efforts to reduce its debt levels appear encouraging. International Paper’s total debt has gone down from $11 billion at the end of 2016 to $5.8 billion as of the end of the first quarter of 2023. The company has limited medium-term debt maturities, with about $1.6 billion due over the next 10 years. Its qualified pension plan is fully funded.

In the first quarter of 2023, the company repurchased shares worth $157 million and paid dividends worth $162 million. For 2023, the company is targeting capital spending of $1 billion to $1.2 billion. It continues to assess disciplined and selective M&A opportunities, particularly in packaging businesses in North America and Europe. Mergers and acquisitions are a key strategy for International Paper to strengthen its packaging business.

Stocks to Consider

Some better-ranked stocks in the basic materials space are AngloGold Ashanti (AU - Free Report) , Gold Fields Limited (GFI - Free Report) and Alamos Gold Inc. (AGI - Free Report) . AU and GFI currently sport a Zacks Rank #1 (Strong Buy), and AGI carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for AngloGold Ashanti’s earnings per share is pegged at $1.94 for 2023. Earnings estimates have been revised 22% upward in the past 60 days. The company has gained 37.6% in the last six months.

The Zacks Consensus Estimate for Gold Fields’ fiscal 2023 earnings per share is pegged at $1.01. Earnings estimates have moved 6.3% north in the past 60 days. Its shares have gained 38.6% in the last six months.

The Zacks Consensus Estimate for Alamos Gold’s earnings per share is pegged at 47 cents for 2023. Earnings estimates have been revised 14.6% upward in the past 60 days. AGI has gained 35.4% in the last six months.

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