International Paper Company (IP) stock climbed 0.7 % this morning. According to our metrics, the company seems fairly valued at today's prices. In the below analysis, we will put International Paper Company's valuation in the context of its poor growth indicators and mixed market sentiment, which are also strong drivers for share price.
International Paper Company produces renewable fiber-based packaging and pulp products in North America, Latin America, Europe, and North Africa. The large-cap Basic Materials company is based in Memphis, United States and has 39,000 full time employees.
IP's P/E Ratio Is Better Than the Sector Average
Compared to the Basic Materials sector's average of 10.03, International Paper Company has a trailing twelve month price to earnings (P/E) ratio of 8.6 and an expected P/E ratio of 16.2. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $4.04 and $2.15 respectively.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since International Paper Company's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.
International Paper Company Is Fairly Valued in Terms of Expected Growth
Another factor pointing to International Paper Company's value is its PEG ratio of 0.79. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 -- but higher than 0 -- its indicates that the company is faitly valued in terms of expected growth.
IP Has an Average P/B Ratio
Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.
Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For International Paper Company, the P/B value is 1.44 while the average for the Basic Materials sector is 2.08.
IP's Weak Cash Flow Generation Is Troubling
The table below shows that International Paper Company is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in International Paper Company's case, free cash flow is growing at an average rate of 0.0% with a coefficient of variability of 2047083756591.6%. We can also see that cash flows from operations are evolving at a 0.0% rate, versus -0.0%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-17 | 2,174,000 | 13,000 | 2,161,000 | 12.03 |
| 2022-02-18 | 2,030,000 | 101,000 | 1,929,000 | -36.86 |
| 2021-02-19 | 3,063,000 | 8,000 | 3,055,000 | -37.24 |
| 2020-02-19 | 3,610,000 | -1,258,000 | 4,868,000 | 1.95 |
| 2019-02-20 | 3,226,000 | -1,549,000 | 4,775,000 | 59.75 |
| 2018-02-22 | 1,624,000 | -1,365,000 | 2,989,000 |
International Paper Company's Is a Profitable Business
If you are looking to make IP a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively International Paper Company is run.
International Paper Company's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-17 | 21,161,000 | -15,143,000 | 28 | 0.0 |
| 2022-02-18 | 19,363,000 | -13,832,000 | 28 | -6.67 |
| 2021-02-19 | 17,565,000 | -12,339,000 | 30 | -3.23 |
| 2020-02-19 | 18,317,000 | -12,669,000 | 31 | -6.06 |
| 2019-02-20 | 23,306,000 | -15,555,000 | 33 | 3.12 |
| 2018-02-22 | 21,743,000 | -14,802,000 | 32 |
International Paper Company's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-17 | 21,161,000 | -4,264,000 | 8 | 0.0 |
| 2022-02-18 | 19,363,000 | -4,065,000 | 8 | 0.0 |
| 2021-02-19 | 17,565,000 | -3,867,000 | 8 | -20.0 |
| 2020-02-19 | 18,317,000 | -3,904,000 | 10 | -23.08 |
| 2019-02-20 | 23,306,000 | -4,789,000 | 13 | 62.5 |
| 2018-02-22 | 21,743,000 | -5,097,000 | 8 |
International Paper Company's cost of revenue is growing at a rate of -0.0% in contrast to 2.9% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is 0.3 and the average operating margins growth rate is 0.6, with coefficients of variability of 6.8% and 22.3% respectively.
We See Mixed Market Signals Regarding IP
International Paper Company has an average rating of hold and target prices ranging from $41.0 to $26.0. At its current price of $34.88, the company is trading 3.9% away from its target price of $33.57. 2.8% of the company's shares are linked to short positions, and 87.6% of the shares are owned by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-06-30 | Vanguard Group Inc | 12% | 41,545,736 | $1,449,115,316 |
| 2023-06-30 | Blackrock Inc. | 11% | 36,527,256 | $1,274,070,728 |
| 2023-06-30 | State Street Corporation | 7% | 23,404,192 | $816,338,241 |
| 2023-06-30 | Price (T.Rowe) Associates Inc | 5% | 17,023,452 | $593,778,023 |
| 2023-06-30 | Invesco Ltd. | 4% | 14,257,013 | $497,284,628 |
| 2023-06-30 | Greenhaven Associates, Inc. | 3% | 9,123,905 | $318,241,816 |
| 2023-06-30 | Franklin Resources, Inc. | 3% | 8,732,842 | $304,601,538 |
| 2023-06-30 | Charles Schwab Investment Management, Inc. | 2% | 7,800,437 | $272,079,250 |
| 2023-06-30 | Geode Capital Management, LLC | 2% | 7,397,071 | $258,009,844 |
| 2023-06-30 | Royal Bank of Canada | 2% | 6,884,849 | $240,143,540 |
