International Paper Company Thinks Inside the Box
Andrew Leckey

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About International Paper Co.

Ticker: IP

Exchange: NYSE

What does the company do? Manufactures paper and packaging.

2010 Financial report:

Net sales: $25.2 billion

Net income: $644 million

Q. What are the expectations for my shares of International Paper Co.?

A. The world's largest paper and packaging company thinks inside the box.

As the U.S. slowly awakens from its economic slumber, an increasing number of corrugated containerboard boxes are needed to ship equipment, software and other products.

Controlling about one-third of North America's containerboard supply, the firm is gaining not only from rising volume but also from its ability to hike the prices it charges companies for all those boxes.

After cutting its dividend in 2009 in response to the economic downturn, the company hiked it in 2010 and once again early this year. Dividend yield is now more than 3 percent.

The universal need for boxes for shipping assures it of solid gains in fast-growing emerging markets. In March it agreed to acquire a stake of up to 75 percent of Indian paper manufacturer Andhra Pradesh Paper Mills Ltd. Last year it purchased the SCA packaging business, which is primarily in China, and it also has operations in Brazil and Russia.

Given all this potential, research analysts such as those at Deutsche Bank have lately boosted their price targets for its shares.

International Paper Co. (IP) shares are up 18 percent this year following gains of 2 percent last year and 127 percent in 2009. The company had a profit of $342 million in its first quarter compared to a loss of $162 million in the year-earlier quarter that included restructuring costs.

International Paper has focused primarily on paper and packaging since 2005 and purchased Weyerhauser's containerboard assets in 2008. It has exited several non-core businesses and aggressively cut costs.

On the negative side, the overall paper industry is in decline in North America and Europe. In addition, it is difficult to differentiate such basic products from those of competitors, with many customers buying on price.

While International Paper reduced its debt and pension liabilities last year, Zacks Equity Research has noted: "Its high debt levels and underfunded pension liability remain concerns as they curb the company's ability to ramp up its capital expenditure."

Consensus analyst recommendation on International Paper is "buy," according to Thomson Reuters, consisting of six "strong buys," five "buys," two "holds" and two "underperforms."

Earnings are expected to increase 32 percent this year compared to 147 forecast for the paper and paper products industry, according to Thomson Reuters. The five-year annualized return is estimated to be 3 percent versus 13 percent for its peers.

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