International Paper Gearing Up For Recovery With Optimistic Containerboard Market Trends: Analyst

Truist Securities analyst Michael Roxland upgraded International Paper Company IP to Buy from Hold, raising the price target to $43 from $30.

The analyst thinks the containerboard market is reaching a positive inflection point and is poised for recovery due to improving demand from the end of destocking and increasingly balanced inventories.

In the broader industry, the analyst's preferred stock to play is IP, which has greater operating leverage and more upside than Westrock Company WRK and Packaging Corporation Of America PKG.

While weak demand and destocking have plagued the industry since 2Q22, demand trends have recently begun to improve. The analyst expects more notable demand improvement on the horizon once destocking concludes. 

IP recently noted that it expects destocking to end in 3Q, while many of PKG's customers suggested that destocking has ended.

Ultimately, the analyst believes that EBITDA generation and margin improvement will be driven by improved fixed cost absorption and the elimination of economic downtime (~$200/ton) instead of higher prices as the industry continues to absorb new supply. 

According to the analyst, IP is also expected to gain from strength in the Paper Products industry, which reported growth in both order backlogs and new export orders in August. 

At present, the Street has become overly bearish on containerboard, which is a sign that the stocks may be oversold and poised to increase, notes Roxland. Since August 2022, the Street has revised its F2024E EPS estimates for IP downward by 57%.

For FY23, the analyst lowered the IP EPS estimate to $2.30 from $2.75. For FY24, the analyst reduced the IP EPS estimate to $3.45 from $3.55.

Price Action: IP shares are trading higher by 2.37% to 34.52 on the last check Thursday.

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