- International Paper beat Q4 2022 EPS by $0.18 but missed revenue guidance due to falling volumes.
- The Company took a one-time (-$533 million) charge in Q4 2022 for selling its 50% stake in Russian joint venture llim SA.
- UBS analyst believes the downside is now priced into the shares.
- Shares trade at 14.5X forward earnings with a 4.47% annual dividend yield and a 3.5% short interest.
- 5 stocks we like better than International Paper
Global packaging and paper products giant International Paper Co. NYSE: IP stock is staging a rally off post-pandemic lows. The Company produces paper products in two segments, International Packaging and Global Cellulose Fibers. International Packaging comprises nearly 70% of total revenues. It makes containerboards.
The Global Cellulose division makes consumer hygiene products like toilet paper, diapers, and tissues. The Company saw a once-in-a-lifetime spike in demand during the COVID pandemic when demand for consumer staples, including personal hygiene products, went through the roof amid shortages.
Other consumer staples manufacturers like Proctor and Gamble Co. NYSE: PG and Clorox Co. NYSE: CLX experienced the same demand shock. The rise in online shopping and delivery spiked packaging demand from services like Amazon.com Inc. NASDAQ: AMZN, FedEx Co. NYSE: FDX, and United Parcel Service Inc. NYSE: UPS as consumers migrated to online shopping and takeout at unprecedented levels.
All Good Things Come to an End
Those were the good times for International Paper. All good things must come to an end. Shares peaked at $61.80 in June 2021 and fell as normalization kicked in. Additional headwinds, including inflationary pressures on raw materials, logistics, freight, and energy costs, further crushed share prices.
However, there may be signs that normalization is nearing an end as shares recover from post-pandemic lows. While the Company beat Q4 2022 EPS estimates, it missed on the top line as volumes continued to fall, offset partially by price increases. The Company took a one-off $533 million non-cash impairment charge with the divesting of its Russian activities, 50% ownership interest in its Russian joint venture llim SA, which was fully booked in Q4 2022.
Printing Money Again
On Jan 31, 2023, International Paper released its fiscal fourth-quarter 2022 results for the quarter ending December 2022. The Company reported an earnings-per-share (EPS) profit of $0.87, excluding non-recurring items, versus consensus analyst estimates for $0.69, an $0.18 beat. Revenues grew 0.9% year-over-year (YoY) to $5.13 billion falling short of analyst estimates of $5.2 billion.
Industrial Packaging's operating profit was flat YoY but still above analyst expectations of $323 million. Rather than a loss, it posted an operating profit increase of $47 million due to price increases offsetting lower volumes. Domestic box shipments fell (-6.2%) YoY. The Global Cellulose Fiber segment hit $35 million in operating profit but still suffered lower volumes.
International Paper CEO Mark Sutton commented, "Our commercial and mill operational performance was solid, while significant inflation and lower demand impacted margins. We also delivered $250 million of earnings benefits from our Building Better IP initiatives.”
Conference Call Takeaways
CEO Sutton reviewed the milestones achieved in the year. EBIT improved by $300 million YoY. Its Global Cellulose Fibers business generated $100 million of earnings growth for 2022. The Company returned $1.9 billion to shareholders through buybacks and dividends. The Company has a strong balance sheet to help navigate the macroeconomic headwinds.
UBS raised its rating on shares of IP to Neutral from Sell, raising its price target to $43 from $31. Analyst Cleve Rickert suggested that downside risk is already priced into the shares, and the dividend remains safe. He commented, “Freight demand leading indicators are troughing, containerboard inventories are stabilizing, and management teams are confirming a flat sequential Q1 corrugated run rate. Some risk remains, evidenced by our 2023 EBITDA estimate 14% below guidance and containerboard supply outgrowing demand in 2023.
That said, the risk-reward is more balanced as we expect the market to look through near-term downside.”
Weekly Ascending Triangle
The Covid pandemic rocketed IP shares from a March 2020 low of $24.98 to peak at $61.80 in June 2021. Shares gave back all their pandemic gains as shares tumbled to $28.18 in September 2022 before staging a rally on the stochastic mini pup and weekly market structure low (MSL) trigger breakout through $34.08.
An ascending triangle is a pattern of flat highs with rising higher lows until the stock breaks out or breaks down ahead of the apex. The critical upper resistance level of the ascending triangle is $41.99. The weekly 20-period exponential moving average (EMA) support is rising at $37.44, and the weekly 50-period MA is flat at $40.75.
The weekly stochastic mini pup has extended through the 80-band. Pullback supports are at $37.18, $35.80, $34.08 weekly MSL trigger, and $32.43.
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