Divestitures And Closures Will Strain Margins But Spur EMEA Opportunities

Key Takeaways

• Divestiture of European box plants due to competition concerns may limit market presence and reduce potential revenues.
  
• Operational inefficiencies and closure plans could pressure margins and strain free cash flow, impacting profitability.
  
• The acquisition of DS Smith and strategic cost initiatives aim to enhance profitability, while innovation and a performance-driven culture could improve operational efficiency.

Catalysts

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

• The necessity for International Paper to divest five box plants in Europe due to competition concerns may limit their market presence and reduce potential revenues in this region.
  
• Higher costs and operational inefficiencies, particularly in the mill system, impacted their productivity by $350 million in 2024, suggesting ongoing challenges that could pressure net margins if not resolved.
  
• The planned closure of certain facilities and the need for significant capital expenditures to maintain existing operations and infrastructure could strain free cash flow and potentially impact earnings negatively.
  
• Dependence on cost-saving measures like the 80/20 productivity improvements without assurance of successful implementation may risk the realization of hoped-for enhancements in margins and earnings.
  
• With potential underinvestment over the past decade, a requirement to catch up on capital and maintenance spending may pressure current financial resources, impacting profitability and return on invested capital in the short to medium term.

International Paper Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on International Paper compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming International Paper's revenue will grow by 11.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.0% today to 6.4% in 3 years time.
• The bearish analysts expect earnings to reach $1.6 billion (and earnings per share of $3.1) by about April 2028, up from $557.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.0x on those 2028 earnings, down from 43.9x today. This future PE is greater than the current PE for the US Packaging industry at 20.9x.
• 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 6.35%, as per the Simply Wall St company report.

International Paper Future Earnings Per Share Growth

Risks

• The closure of five box plants in Northern France, Northern Spain, and Portugal as part of the acquisition of DS Smith may streamline operations and reduce costs, thus potentially improving profit margins.
  
• The acquisition of DS Smith and its successful integration could unlock new market opportunities in EMEA and North America, contributing positively to revenue growth.
  
• International Paper's focus on innovation and creating a performance-driven culture could lead to improvements in operational efficiency and revenue growth, enhancing overall earnings.
  
• Investments in new facilities, like the state-of-the-art corrugated box facility in Waterloo, Iowa, aim to optimize the mill-to-box system, leading to a lower cost structure and potentially driving net margins higher.
  
• The strategy to drive $4 billion of EBITDA through cost reductions, commercial improvements, and a reset from volume to value focus positions the company for potential profitability improvements in the medium term.

Valuation

• The assumed bearish price target for International Paper is $48.33, which represents one standard deviation below the consensus price target of $56.05. This valuation is based on what can be assumed as the expectations of International Paper's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $67.0, and the most bearish reporting a price target of just $44.9.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $25.7 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $46.28, the bearish analyst price target of $48.33 is 4.2% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.