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International Paper: A Strong Buy

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Rising earnings estimates on the back of reports suggesting the successful implementation of $50 per ton price increase by containerboard producers in September helped International Paper Co. (IP - Free Report) achieve a Zacks #1 Rank (Strong Buy) on October 2. This global paper and packaging company has delivered positive earnings surprises in three of the last four quarters with an average beat of 8.21%.

Moreover, the stock hit its 52-week high of $37.25 on September 24. With a solid year-to-date return of 21.6%, good track record of beating quarterly earnings estimates, revenue growth better than its peers and long-term earnings growth projection of 6%, this stock offers an attractive investment opportunity.
The Rank Driver
Revenue growth better than its peers, successful implementation of price increases, merger and acquisition strategy, smooth ongoing integration of Temple Inland and expected synergies, expansion in India, Russia and China are the primary rank drivers for this stock. 
It is also worth mentioning that the International Paper and Temple Inland combination will fortify the packaging business of North America by increasing its share in the corrugated packaging market to 34% from the current level of 27%.
On July 26, 2012, International Paper reported second-quarter 2012 adjusted earnings of 46 cents per share, down 41.8% from 79 cents per share earned in the prior-year quarter. Results also fell short of Zacks Consensus Estimate by 2.1%. 
Net sales rose 6.5% year over year to $7.08 billion, but missed the Zacks Consensus Estimate of $7.31 billion. Segment operating income decreased 13.4% year over year to $426 million.
Cash flow from operating activities improved to $1.4 billion during the first half of 2012 compared with $1.2 billion in the year ago period. Debt-to-capitalization ratio was 62.9% as of June 30, 2012, compared with of 62.2% as of March 31, 2012, and 59.9% as of December 31, 2011
Earnings Estimate Revisions
The Zacks Consensus Estimate for 2012 increased 2.8% to $2.56 per share as 6 out of 13 estimates were raised over the last 30 days. However, the current estimate implies a year-over-year decline of 17.4%. 
For 2013, 8 out of 13 estimates were revised higher over the same time frame, lifting the Zacks Consensus Estimate by 5.4% to $3.62 per share. This implies an annual growth of 41.2%. 
International Paper currently trades at a forward P/E of 14.0x, a 7% premium to the peer group average of 13.0x. Also, on a price-to-book basis, the shares are trading at 2.22x, a 178% premium to the peer group average of 0.8x. Given the company's strong fundamentals, the premium valuation is justified.
International Paper has a trailing 12-month ROE of 15.6% compared with the peer group average of 4.8%. 
About the Company
Headquartered in Memphis, Tennessee, International Paper is a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia, and North Africa. International Paper conducts its businesses through four segments - Industrial Packaging, Distribution Segment or Xpedx, Printing Papers and Consumer Packaging segment. The company has a market capitalization of roughly $15.74 billion. 
Among other paper and packaging stocks, we currently have Zacks #1 Rank on Rock-Tenn Co. .

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