International Paper Hits 52-Week High - Analyst Blog

Shares of leading packaging and paper manufacturer International Paper Company IP scaled a 52-week high of $50.65 on Jun 30, before closing the trading session a notch lower at $50.47 for a modest one-year return of 11.8%. Despite its strong price appreciation, this Zacks Rank #4 (Sell) stock has the wherewithal to continue its growth curve. The stock is currently trading at a forward P/E of 13.8x and has long-term earnings growth expectation of 12.1%.

Growth Drivers

International Paper recently completed the spin-off of its struggling xpedx distribution business in a tax-efficient transaction under a Reverse Morris Trust structure. According to the terms of the deal, xpedx will merge with UWW Holdings, the parent company of Unisource Worldwide, to form a new entity titled Veritiv Corporation. International Paper will receive $400 million in cash and own 51% stake of the new company, with UWW Holdings owning the remainder.

In addition to higher liquidity, the transaction improved the profitability of the company that was saddled with weaker sales from its distribution business. Over the years, International Paper has undergone various restructuring activities to offload its non-core operations and focus on the traditional industrial packaging businesses. The xpedx spin-off was part of its strategy to increase focus on legacy business, while attempting to create value by forming a relatively more competitive entity.

Earlier in June this year, International Paper issued $1.6 billion worth of senior unsecured bonds and announced a cash tender offer to buy back outstanding debt worth around $1.0 billion. The refinancing transaction was designed to capitalize on the lucrative low-interest rate environment and followed an upgraded credit rating by Moody's Investor Service, the bond credit rating business of Moody's Corporation MCO.

On May 28, the rating agency raised International Paper's senior unsecured debt to Baa2, citing sustained de-leveraging of its capital structure and strong free cash flow generation. The rating reflects improved financial and operating prospects of the company, with a vertically integrated business, global supply chain and distribution system.

All these measures instilled higher investor confidence, catapulting the stock to a 52-week high.

Other Stocks to Consider

Stocks in the industry that warrant a look include Graphic Packaging Holding Company GPK and Sonoco Products Co. SON, both carrying Zacks Rank #2 (Buy).