Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewingÂ 5 Low PEmg Companies for the Defensive Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how International Paper Co. (IP) fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â International Paper Company (International Paper) is a global paper and packaging company, with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. The Company operates in four segments: Industrial Packaging, Printing Papers, Consumer Packaging and Distribution. As of December 31, 2012, it owned or managed approximately 327,000 acres of forestland in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. On January 3, 2013, it acquired joint venture partner, Sabanci Holding. In April 2014, International Paper acquired the remaining 25% of shares of Orsa International Paper Embalagens S.A. from its joint venture partner, Brazilian pulp and packaging producer Jari Celulose, Embalagens e Papel S.A.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$34.07|
|Value Based on 0% Growth||$19.97|
|Market Implied Growth Rate||5.46%|
|Net Current Asset Value (NCAV)||-$33.00|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
International Paper is suitable for Enterprising Investors but not Defensive Investors. Â The company’s current ratio is too low and there has been insufficient earnings stability in the last ten years for the Defensive Investor. Â The Enterprising Investor’s only concern is with the high level of debt relative to the current assets. Â As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of 5 Undervalued Companies for the Enterprising Investor and other screens found in MG Stocks & Screens. Â From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.74 in 2009 to $2.35 for 2013. Â This level of demonstrated growth outpaces the market’s implied estimate of 5.46% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on International Paper Co. (IP)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in International Paper Co. (IP) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.