Packaging Stocks

International Paper Stock Analysis – May 2015 Quarterly Update $IP

500px-International_Paper.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – May 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is an International Paper stock analysis showing a specific look at how International Paper Co. (IP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): International Paper Company (International Paper) is a paper and packaging company, with markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. As of September 30, 2014, The Company operates in three segments: Industrial Packaging, Printing Papers and Consumer Packaging. As of December 31, 2013, the Company operated 25 pulp, paper and packaging mills, 181 converting and packaging plants, 18 recycling plants and three bag facilities in the United States. As of December 31, 2013, it has production facilities in Europe, Asia, Africa, India, Latin America and South America, which included 16 pulp, paper and packaging mills, 72 converting and packaging plants and two recycling plants. As of December 31, 2013, it owned or managed approximately332,000 acres of forestland in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $52.60
MG Value $85.29
MG Opinion Undervalued
Value Based on 3% Growth $38.54
Value Based on 0% Growth $22.59
Market Implied Growth Rate 5.64%
Net Current Asset Value (NCAV) -$36.46
PEmg 19.79
Current Ratio 1.60
PB Ratio 4.59

Balance Sheet – March 2015

Current Assets $7,660,000,000
Current Liabilities $4,776,000,000
Total Debt $8,461,000,000
Total Assets $27,967,000,000
Intangible Assets $3,677,000,000
Total Liabilities $23,109,000,000
Outstanding Shares 423,700,000

Earnings Per Share

2015 (estimate) $3.75
2014 $1.29
2013 $3.11
2012 $1.80
2011 $3.03
2010 $1.48
2009 $1.55
2008 -$3.05
2007 $2.70
2006 $2.18
2005 $2.21

Earnings Per Share – ModernGraham

2015 (estimate) $2.66
2014 $2.12
2013 $2.42
2012 $1.71
2011 $1.49
2010 $0.80

Dividend History

Conclusion:

As this International Paper stock analysis shows, International Paper Co. is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the low current ratio, lack of earnings stability over the last ten years, and the high PEmg ratio.  The Enterprising Investor is only concerned with the level of debt relative to the net current assets.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.49 in 2011 to an estimated $2.66 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 5.64% annual earnings growth over the next 7-10 years and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on International Paper Co. (IP)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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