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International Paper Rides on Restructuring & Acquisitions

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On Sep 3, we issued an updated research report on paper and packaging firm, International Paper Company (IP - Free Report) . The company's restructuring initiatives, shifting focus to its core strengths and favorable demand trends bode well for healthy long-term growth.
 
Poised For Improved 2018 Results
 
International Paper delivered second-quarter 2018 adjusted earnings of $1.19 per share that surged 80% year over year and also outpaced the Zacks Consensus Estimate of $1.09. The North American Industrial Packaging business outperformed industry shipments in the first two quarters of 2018. The company is witnessing strong demand across all channels and realized about 50% of its recent box price increase exiting the second quarter. The company anticipates realizing 90% by the third quarter-end with full realization expected by year end. Further, 75% of the planned maintenance outages have been completed in the first half of the year.
 
In the European packaging business, once the Madrid mill starts operating, it will materially enhance the company’s margin along with improving cost position and product range. In the Global Cellulose Fibers business, the company delivered record fluff pulp shipments during the quarter. Global pulp demand remains strong and demand in the fluff segment continues to grow at 4-5% annually. New product introductions in the fluff pulp segment as well as the company’s optimization initiatives are likely to drive results. In the Printing Papers segment, improved global demand will bolster segment revenues. Backed by healthy demand across its global operations, the company anticipates delivering a second consecutive year of strong earnings growth in 2018.
 
Restructuring Efforts to Reap Benefits
 
International Paper has undertaken restructuring initiatives to transform itself into a core packaging company. 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 through exports from the United States and other parts of the world.
 
International Paper also completed the divesture of its consumer packaging business in North America to Graphic Packaging Holding Company (GPK - Free Report) . The divesture helped the company to focus on its core businesses and strengthen balance sheet as Graphic Packaging assumed $660 million of its debt. The company intends to invest significantly to improve its North American containerboard mill system, enhance product quality as well as manufacturing and delivery costs.
 
Mergers and Acquisitions to Aid Growth
 
Mergers and acquisitions remain a key strategy for International Paper to strengthen its long-term business proposition. International Paper has completed the acquisition of leading timberland owner Weyerhaeuser Co.’s (WY - Free Report) pulp business for $2.2 billion in cash. With a combined capacity of nearly 1.9 million metric tons of pulp, the transaction is likely to strengthen the company’s position in the global fluff pulp market and improvement its operating cash flow.
 
Additionally, the company expects the acquisition to generate annual synergies of approximately $175 million by the end of 2018 along with a higher flexibility to manage a wide portfolio of products. This is likely to aid the company cater to customer needs through superior R&D capabilities and priceless patent portfolio.
 
 
However, International Paper has underperformed its industry’s performance with respect to share price over the past year. The stock slumped 7%, while the industry gained 10%. This can be attributed to the persistent inflation in input and distribution costs. This will affect the company’s margins in the near term. However, the company will be able to combat this by implementing price increases.
 
The stock is nevertheless significantly undervalued and currently trading at a forward 12-month price-to-earnings ratio of 11.4, which compares favorably with the industry P/E ratio of 12.9. Given that the stock is trading at low valuation levels, it provides an attractive investment opportunity.
 
International Paper currently carries a Zacks Rank #2 (Buy). Additionally, the stock currently has a Zacks VGM score of A. Here V stands for Value, G for Growth and M for Momentum. Such a score allows you to eliminate the negative aspects of stocks and select winners. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best investment opportunities for investors. Consequently, the company appears to be a compelling investment proposition at the moment.
 
Another top-ranked stock in the same sector is Celanese Corporation (CE - Free Report) , which sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Celanese has a long-term earnings growth rate of 10%. The stock has rallied 19% in a year’s time.
 
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