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What to Expect from International Paper (IP) in Q2 Earnings?

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Leading packaging and paper manufacturer International Paper Company (IP - Free Report) is scheduled to report second-quarter 2017 results before the opening bell on Jul 27. In the last reported quarter, the company’s adjusted earnings beat the Zacks Consensus Estimate by 4 cents. In the trailing four quarters, the company topped earnings estimates thrice with an average positive surprise of 4.1%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

During the quarter, International Paper inked a definitive agreement to divest its foodservice business in China. The foodservice business offers innovative single-use packaging solutions, catering to the evolving needs of its customers. Over the past couple of years, the company has strategically offloaded businesses in China to focus more on its U.S. operations. It believes that it could cater to the Chinese and Asian markets more effectively by supplying globally competitive products primarily through its Ilim joint venture in Russia and exports from the U.S. and other parts of the world. The company is taking initiatives to drive further margin expansion over time across the businesses.

However, International Paper depends heavily on raw materials such as wood fiber, purchased in the form of pulpwood, wood chips and old corrugated containers (OCC), and certain chemicals, including caustic soda and starch, energy sources, principally natural gas, coal and fuel oil. Rising energy, chemical and OCC costs remain headwinds, particularly under harsh winter conditions. This is likely to lower its profitability to some extent.

International Paper has a huge burden of pension obligations for substantially all U.S. salaried employees hired prior to Jul 1, 2004 and largely all hourly and union employees regardless of the hire date. Pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns, changes in general interest rates and the number of retirees are likely to increase pension costs and reduce its cash flow, thereby limiting the positives from its acquisition binge, a primary growth driver.

Earnings Whispers

Our proven model does not conclusively show that International Paper is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -1.56%. This is because the Zacks Consensus Estimate is pegged at 64 cents while the Most Accurate estimate stands at 63 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: International Paper has a Zacks Rank #3. While this increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

AGCO Corporation (AGCO - Free Report) , with an Earnings ESP of +2.89% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Agenus Inc. (AGEN - Free Report) with an Earnings ESP of +5.56% and a Zacks Rank #2.

Align Technology, Inc. (ALGN - Free Report) with an Earnings ESP of +1.37% and a Zacks Rank #2.

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