Zacks Investment Research | Oct 09, 2017 08:40AM ET
On Oct 9, we issued an updated research report on paper and packaging firm, International Paper Company (NYSE:IP) .
Growth Drivers
International Paper is undergoing restructuring initiatives to transform itself into a core packaging company. The company intends to invest $300 million through 2017 to improve its North American containerboard mill system, enhance product quality, and reduce manufacturing and delivery costs. These projects are expected to have a collective internal rate of return of 20%.
At the same time, International Paper is divesting its non-core businesses to focus more resources on high-return capital projects in its core businesses that can drive additional earnings growth. The company’s strategic move is aimed to improve its long-term profitability as it faces stiff competition from diverse players across the industry.
International Paper recently completed the divesture of its foodservice business in China. The assets were sold to Huhtamaki Hong Kong Limited, one of the world’s largest packaging companies with 68 manufacturing units and 23 sales offices in 34 countries, for an undisclosed amount. The divested asset portfolio included two manufacturing plants with employee strength of roughly 200.
Mergers and acquisitions remain a key strategy for International Paper to strengthen its long-term business proposition. In North America, the company envisions a large opportunity within its industrial packaging business, which continues to generate the best margins in the industry. The company is taking initiatives to drive further margin expansion across the business through inorganic growth. The acquisition of Weyerhaeuser Co.’s pulp business has strengthened its position in the global fluff pulp market and augmented its operating cash flow. With a combined capacity of nearly 1.9 million metric tons of pulp, the acquisition is likely to generate annual synergies of approximately $175 million by the end of 2018 along with a higher flexibility to manage a wide portfolio of products to meet customer needs through superior R&D capabilities and priceless patent portfolio.
Headwinds
However, the company depends heavily on raw materials such as wood fiber, purchased in the form of pulpwood, wood chips and old corrugated containers (OCC), and certain chemicals like caustic soda and starch, and energy sources, principally natural gas, coal and fuel oil. Rising energy, chemical and OCC costs remain headwinds, particularly in harsh winter conditions. This is likely to affect its profitability to some extent. The company has underperformed the Zacks Investment Research
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