Company Overview: International Paper Company (NYSE: IP) is a global manufacturer of renewable fibre-based packaging, pulp, and paper with facilities in North America, Latin America, Europe, North Africa, and Europe. Its operating segments are 1) Industrial Packaging, 2) Global Cellulose Fibres and 3) Printing Papers.

IP Details

Key Takeaways from Q3FY21 (ended September 30, 2021)

• Double-Digit Growth in Revenue: In Q3FY21, the company's total revenue amounted to USD 5.71 billion, representing an 11.54% increase year-over-year from USD 5.12 billion in Q3FY20.
• Surge in Net Income: The company's net income increased to USD 864 million in Q3FY21 from USD 204 million in Q3FY20, representing diluted EPS of USD 2.20 in Q3FY21, including a net after-tax gain of USD 0.89 per share from the sale of its mill in Kwidzyn, Poland.
• Share Repurchase Program: The company has repurchased 3.58 million shares during the quarter for an aggregate repurchase value of USD 212 million. Additionally, on October 12, 2021, IP's board had authorized to buy back up to USD 2 billion worth of common shares in addition to its previous authorization of USD 1.3 billion.
• Debt Reduction: IP repaid USD 235 million of debt in Q3FY21 and USD 1.1 billion during 9MFY21.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On November 12, 2021, the company priced its cash tender offer for up to USD 500 million aggregate principal amount of outstanding notes.
• On October 12, 2021, the company declared a quarterly dividend of USD 0.4625 per common share (reduced from USD 0.5125 per share) for Q4FY21, payable on December 15, 2021, to shareholders of record on November 15, 2021.
• On October 01, 2021, IP completed its Printing Papers segment spin-off into a standalone, publicly quoted company named Sylvamo Corporation (NYSE: SLVM). IP's shareholders received one share of SLVM for every eleven shares held in IP as part of the spin-off. The company currently holds a ~19.9% stake in SLVM.
• On August 06, 2021, IP sold its pulp and paper mill in Kwidzyn, Poland, for EUR 669 million in cash, subject to working capital and debt adjustments.

Segment Wise Results Q3FY21

• Industrial Packaging: This segment provides linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. It accounted for 53% of the total revenuein Q3FY21 and reported YoY growth of 8.47% to USD 4.09 billion.
• Global Cellulose Fibers: Its product portfolio consists of fluff, market, and specialty pulps. This segment contributed 76% to the total Q3FY21 revenueand expanded by 29.26% YoY to USD 729 million, primarily due to higher average selling price (ASP), lessened operating costs and planned maintenance outage expenses.
• Printing Papers: This segment is engaged primarily in uncoated papers. It generated sales of USD 846 million in Q3FY21, representing 81% of the total revenue and a 13.86% increase YoY, driven by an increase in ASP and lower maintenance outage expenses partially offset by increased input costs.

Balance Sheet & Liquidity Position

• Decreased Cash Balance: The company exited Q3FY21 with total cash and cash equivalents of USD 2.12 billion, significantly lower than USD 5.45 billion at the end of FY20.
• Cashflow from Operations: Operating cash inflow in Q3FY21 decreased to USD 645 million from USD 735 million in the prior corresponding period.
• Reduction in Debt: IP reported total outstanding debt of USD 8.47 billion at Q3FY21 end, lower than USD 8.70 billion as of September 30, 2020.

Key Metrics: In Q3FY21, IP's operating and net margins were 15.2% and 13.5%, higher than the industry median of 10.6% and 6.4%, respectively. ROE stood at 9.6%, 530 bps more than the industry median. Debt/Equity was 0.88x as of September 30, 2021, lower than 1.23x on September 30, 2020.

Profitability and Leverage Profile; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 45.49% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and T. Rowe Price Associates, Inc. hold the maximum stake in the company at 11.80% and 11.59%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Input Price Risk: IP's manufacturing process requires significant inputs such as virgin wood fiber and energy sources, including natural gas, electricity and fuel oil, pricing for which can be highly volatile and unpredictable. Therefore, any lag in the supply of requisite quantity or unfavourable pricing could distort the company's overall performance.
• Cyclical Industry: The company operates in the container and packaging industry, which suffers from economic cyclicality and changes in consumer preferences. These factors can reduce the demand for the company's products and hence its ASP.
• Competition Risk: IP competes directly with domestic and international players. Hence, competitors' advanced product development, operating efficiencies, and pricing strategies could negatively impact its financials.
• Climate Change: The company's and its suppliers' operational performance are subject to climate change and local weather conditions.

Outlook

• Looking forward, IP expects higher price realizations in the Industrial Packaging segment in Q4FY21, whereas it foresees a stable price and product mix for Cellulose Fibers. Industrial Packaging is also forecasted to witness a robust seasonal demand, with snubbed volumes expected in the Cellulose Fibers segment due to port congestions.
• The company anticipates higher maintenance outages of USD 3 million and USD 37 million in Industrial Packaging and Cellulose Fibers, respectively, for the coming quarter.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last six months, IP's share price has corrected 17.94%. The stock is currently leaning towards the lower end of its 52-week range of USD 44.01 to USD 61.80. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of high teens (in percentage terms). We believe that the company can trade at a discount compared to its peer's average, considering the risks involving input price volatility, the impact of climate change, and the dependence on economic cyclicality. We have taken peers like Graphic Packaging Holding Company (NYSE: GPK) and Westrock Company (NYSE: WRK). Considering the strong topline performance, strong profitability margins, favourable pricing across segments, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 48.89, down 0.77% as of November 17, 2021, 10:00 AM ET.

IP Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.