Customer Focus And DS Smith Integration Will Improve Efficiency

Key Takeaways

• International Paper's 80/20 strategy and cost optimization efforts are set to drive profitable growth through enhanced customer retention and market share.
  
• Integrating DS Smith and cost-cutting initiatives should significantly enhance net margins and earnings, propelling commercial improvements.
  
• Macroeconomic uncertainties and integration risks could dampen revenue growth and financial stability, while rising costs may pressure margins without sufficient price adjustments.

Catalysts

Produces and sells renewable fiber-based packaging and pulp products in North America, Latin America, Europe, and North Africa.

• International Paper's focus on an 80/20 strategy, targeting their most valuable customers and reallocating resources to improve service and reliability, is expected to drive profitable growth and improve revenue through increased market share and customer retention.
  
• The integration of DS Smith is anticipated to deliver significant synergies, with projected savings of $600 million to $700 million, which will enhance net margins and earnings over the coming years.
  
• Cost-cutting initiatives are expected to yield $1.9 billion in savings by 2027, enhancing net margins and potentially increasing earnings, with a target of approximately $400 million in savings already identified.
  
• International Paper's commercial improvements, including closing the volume gap to the market and investing in customer experience, aim to grow market share and improve earnings, with a target of $1.1 billion in commercial improvement benefits by 2027.
  
• The company's strategy to optimize its mill and box plant footprint, along with a focus on reducing sourcing and supply chain costs, should improve efficiencies and bolster net margins, contributing to overall earnings growth.

International Paper Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming International Paper's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 6.8% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $3.64) by about May 2028, up from $396.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.5 billion in earnings, and the most bearish expecting $1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, down from 59.3x today. This future PE is greater than the current PE for the US Packaging industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.62%, as per the Simply Wall St company report.

International Paper Future Earnings Per Share Growth

Risks

• The declining demand in North America and Europe raises concerns, as industry demand in North America was down 2% and European markets were notably soft, which may impact revenue growth.
  
• The company faces macroeconomic uncertainties, including trade tensions and tariffs, which could pressure consumer confidence and demand, potentially affecting net margins.
  
• The integration of DS Smith, while promising cost synergies, poses execution risks that may result in higher costs or delayed benefits, impacting earnings projections.
  
• The reliance on external factors, such as potential stabilization or improvement in the economic environment, introduces unpredictability into achieving earnings targets, influencing overall financial stability.
  
• Rising input costs, notably energy prices early in the quarter, and planned maintenance outages can bring additional operational expenses, potentially reducing net margins if not adequately offset by price adjustments.

Valuation

• The analysts have a consensus price target of $55.136 for International Paper based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $44.9.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $29.1 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $44.45, the analyst price target of $55.14 is 19.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.