Senator Investment Group, a hedge fund managed by Doug Silverman, has disclosed a position of over 23 million shares in International Paper Company (NYSE:IP). This gives the fund 5.2% of the total shares outstanding of the $21 billion market cap manufacturer of paper and packaging products. We track 13F filings from funds such as Senator as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year), and so we can see that at the beginning of January Silverman and his team only owned 4.2 million shares of the stock as well as 3.5 million call options (see more of Silverman’s stock picks).
Senator was the largest shareholder out of the hedge funds and other notable investors which we track in our database, but others had positions in International Paper Company as well. Billionaire Dan Loeb’s Third Point initiated a position of 1.5 million shares in the fourth quarter of 2012 (check out more stocks Loeb was buying). Vinik Asset Management, managed by billionaire Jeffrey Vinik, cut its stake by 9% between October and December but still closed 2012 with 1.6 million shares in its portfolio (find Vinik’s favorite stocks). Iridian Asset Management was another major shareholder, reporting ownership of 3.1 million shares; that fund is managed by David Cohen and Harold Levy.
In 2012, International Paper Company grew its revenue by 7% compared to 2011. Earnings shrunk significantly if restructuring charges are included as costs in both years; the paper industry in general is in a period of transition, and for the next couple years we would imagine that “special items” will continue to affect the bottom line of International Paper and its peers. With these factors bringing net income down for the year, the stock trades at 26 times its trailing earnings. Analyst expectations are for business conditions to improve over the next couple years, and as a result the forward P/E is only 10- which would represent pure value levels for a company which at least in recent years has managed to grow its sales. Looking out further, the five-year PEG ratio is low at 0.4; we’d also note that International Paper pays a dividend yield of 2.7%.
Other providers of paper and packaging products include Domtar Corp (NYSE:UFS), MeadWestvaco Corp. (NYSE:MWV), Clearwater Paper Corp (NYSE:CLW), and KapStone Paper and Packaging Corp. (NYSE:KS). Each of these companies also carries a large discrepancy between their trailing and forward earnings multiples, as the sell-side seems to be expecting the industry as a whole to do better as well as the possibility of ending restructuring charges. While all four of these stocks carry trailing P/Es in the 20 to 30 range, meaning that International Paper is not particularly overpriced compare to its peers, in terms of 2014 numbers the multiples are generally between 10 and 13. The exception is MeadWestvaco, a packaging company which is valued at 18 times consensus earnings or that year. This means that International Paper- by far the largest of this peer group- is also the cheapest assuming that analyst expectations are correct.
Of course we’d be wary of taking Street projections at face value, and in absolute terms International Paper would be too dependent on future improvement in order to be a good buy in our opinion. Yet if an investor is interested in paper and packaging we look at the company compared to its peers and it seems to have at least as good prospects, a relatively low valuation in terms of forward estimates, and yet a considerably higher market capitalization. As such those looking or names in the industry should probably start their search by looking more closely into how International Paper’s charges might unfold over time.
Disclosure: I own no shares of any stocks mentioned in this article.
