Rising Energy Costs And Overcapacity Will Squeeze Margins

Key Takeaways

• Ongoing cost inflation, industry overcapacity, and regulatory pressures are set to erode margins and challenge core business sustainability.
  
• Technological shifts and changing consumer preferences threaten traditional paper products, limiting growth and exposing the business model to structural risk.
  
• The company’s strategic cost reductions, portfolio optimization, and innovation investments position it for margin expansion, stable revenues, and reduced volatility through diversified growth.

Catalysts

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

• Intensifying cost pressures from rising energy and raw material prices are expected to persist due to ongoing carbon pricing schemes and global inflation, which will erode operating margins and directly challenge International Paper’s ability to maintain profitability, particularly as efficiency gains plateau.
  
• The accelerating digital shift continues to reduce reliance on physical packaging and printed materials, which, when combined with increasing global adoption of e-invoicing, paperless logistics, and digital advertising, will cause structural declines in legacy revenue streams and limit future sales growth.
  
• Consumer and regulatory demand for zero-waste and reusable packaging solutions is forecast to rise significantly, undermining the long-term competitiveness of fiber-based and disposable paper products, and creating substantial risk to International Paper’s core business model and top-line growth.
  
• Overcapacity in the global containerboard and corrugated packaging industry is expected to worsen as new entrants and incumbent producers add supply, driving price wars, eroding International Paper’s market share, and resulting in sustained margin compression across its geographic segments.
  
• International Paper’s heavy reliance on the mature and slow-growing North American market, coupled with large debt and pension obligations, is anticipated to further constrain financial flexibility, limit its ability to invest in new sustainable technologies, and suppress both return on invested capital and future earnings growth.

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 10.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.0% today to 6.8% in 3 years time.
• The bearish analysts expect earnings to reach $1.8 billion (and earnings per share of $3.36) by about July 2028, up from $396.0 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 18.2x on those 2028 earnings, down from 72.1x today. This future PE is lower than the current PE for the US Packaging industry at 27.7x.
• 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 6.76%, as per the Simply Wall St company report.

International Paper Future Earnings Per Share Growth

Risks

• International Paper’s aggressive cost-reduction and optimization programs, including $1.9 billion of cost out and synergies from the DS Smith acquisition, could drive significant margin expansion and boost long-term earnings.
  
• Momentum in winning back market share through improved service, reliability, and targeted commercial excellence, especially in the North American market, may lead to stable or even growing revenues despite near-term demand headwinds.
  
• The company’s core packaging businesses are experiencing increasing demand from trends like e-commerce growth, sustainability, and regulatory shifts away from plastics, all of which could support price realization and long-term top-line growth.
  
• Strategic investments in operational efficiency, manufacturing automation, and customer-centric innovations position International Paper to improve its return on invested capital and enhance profitability over time.
  
• Expansion into Europe through the DS Smith acquisition not only diversifies earnings geographically but also provides exposure to emerging markets and advanced packaging innovation, which may reduce revenue volatility and drive higher, more stable margins in the future.

Valuation

• The assumed bearish price target for International Paper is $41.6, which represents the lowest price target estimate amongst analysts. 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 $65.0, and the most bearish reporting a price target of just $41.6.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $26.6 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 6.8%.
• Given the current share price of $54.1, the bearish analyst price target of $41.6 is 30.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.