International Paper Company (NYSE:IP) was hit by an analyst downgrade on September 17th, which has pulled the stock to “only” an 18% gain so far in the third quarter of 2012 (for the year it is up 14%). The $15 billion market cap company does just what it says on the tin: it produces and distributes paper and paperboard products globally.
International Paper Company didn’t do that too well during the second quarter of 2012, however. While its revenues were up- 6% higher than in the second quarter of 2011- the company saw considerably higher costs, particularly in cost of goods sold and in distribution expenses. As a result, net income came in at $134 million versus $219 million in last year’s second quarter. Out of the company’s segments, the largest decline in operating income came in Printing Papers. The first half of International Paper’s year now stands at a revenue increase as well, but a 44% decline in net income. Some of this decline may be due to a struggling global economy. International Paper doesn’t have an extreme amount of exposure to the broader economy, but does carry a somewhat high beta of 1.5.
Why has the stock rebounded during the third quarter, then, even as this report came out? Possibly because the decline in its price over the course of 2012 had turned it into a stealth large-cap value play, particularly among investors who, like sell-side analysts, are bullish on its prospects for next year. International Paper trades at 14 times trailing earnings and pays a 3% dividend yield, which is hard to call overpriced on its face. The forward P/E is 10, but that assumes $2.49 in EPS this year and then a 37% increase in 2013. We wouldn’t be that optimistic, though between its valuation and yield the company does not need that much growth to be a good investment.
A few hedge funds increased their positions in International Paper Company during the second quarter, possibly having anticipated the rise in the stock’s price since the beginning of July. The largest position according to our database of 13F filings belonged to Iridian Asset Management. The fund, which is run by David Cohen and Harold Levy and likes to buy depressed stocks, increased its stake by 39% to a total of 4.3 million shares (find more stocks Iridian was buying). Curtis Macnguyen’s Ivory Capital also added shares during the quarter and finished June with a position of 1.5 million shares in the paper company (learn more about Ivory Capital and its favorite stocks). Billionaire Ken Griffin’s Citadel Investment Group was another investor in the company, increasing its position to a total of about 720,000 shares (see more stock picks from billionaire Ken Griffin).
International Paper’s closest peers are Domtar Corp. (NYSE:UFS) and MeadWestvaco Corp. (NYSE:MWV). Domtar is a bit cheaper on a trailing basis, at 11 times earnings, but the larger International Paper pulls even on a forward basis thanks to analyst optimism. MeadWestvaco, whose business was stagnant last quarter compared to the same period in 2011, has considerably higher multiples: it trades at 23 and 17 times trailing and forward earnings, respectively. It is not as good a buy, with Domtar seeming to offer a slightly better value for a smaller company with a slightly lower dividend yield. We think that International Paper should also be compared to Sonoco Products Company (NYSE:SON) and Clearwater Paper Corp (NYSE:CLW). These peers are expected to see substantial growth as well: they both trade at higher trailing earnings multiples, but on a forward basis are quite close to International Paper. Clearwater actually saw a large increase in its earnings last quarter and could be worthy of further review, but Sonoco- as with other paper companies- is struggling and therefore wouldn’t be as good a value from our perspective.