NYSE: IP
International Paper Co
Fisher College of Business
Report created March 3, 2005
Current Price: 38.29
1-Yr Price Target: 41.8
Analyst Information:
Name: Antonio Ferraro
Email: ferraro_22@cob.osu.edu
Phone: 215.990.3471
Advisor: Royce West, CFA
Course: Finance 824
Analyst’s Notes
•
•
•
•
•
•
•
4Q results were in line with expectations as
higher prices in paper and packaging were
offset by seasonally slower results in paper,
industrial packaging, and wood.
IP is targeting $3 billion in total debt
reduction to $12 billion gross debt by end of
2006.
2004 price increases in the paper &
packaging industry will work their way to
the bottom line this year.
Pro-growth policies in the U.S. point to an
expanding economy, which is positive for IP
but negative for the materials sector relative
to the S&P 500.
IP offers decent long-term price appreciation
of roughly 12% based on sales growth
projections and margin expansion.
IP multiples appear undervalued on both and
absolute and industry basis.
IP fits strongly into our overall portfolio
strategy.
5-Yr Price Target: 58.97
12-mo Rating
Sell
Hold
Buy
5-yr Rating
Sell
Under
Weight
Hold
Market
Weight
Buy
Over
Weight
Growth/Income
Growth
Sector Rating
Value/Growth Analysis
P/E
Value
Yield
Value Growth/Income Growth
Beta
Value Growth/Income Growth
Price:
52 Week Price Range:
Shares Outstanding:
Dividend:
Dividend Yield:
Beta:
Average Trading Volume:
Fiscal Year End:
$38.29
$37-$45
486 million
$1.00
2.6%
1.1
3 million sh
Dec. 31
EPS Trend
$40
D o llars
3
2.5
2
1.5
1
$10
0.5
$0
0
2/
25
/0
2
6/
25
/0
2
10
/2
5/
02
2/
25
/0
3
6/
25
/0
3
10
/2
5/
03
2/
25
/0
4
6/
25
/0
4
10
/2
5/
04
2/
25
/0
5
Growth
Key Statistics
$50
$20
Growth/Income
Sector Value
International Paper Stock Price
$30
Rating: BUY
Recommendations:
2002
2003
Actual
2004
2005(E)
First Call Consensus
2006(E)
Table of Contents
Company Overview
Business Segments
Economic Overview
GDP
Energy
Inflation & Interest Rates
Sector Overview
GDP & Commodity Prices
Currency Hedge
Stock Market Environment
Industry Overview
Capacity Reduction Trend
Capex Trend
Company Outlook
Pulp & Paper Prices Rising
Maintaining Financial Discipline
Risks
Financial Statement Analysis
Profitability Measures
Management Effectiveness Ratios
Financial Strength
Cash Flows
Forecasted Earnings
Valuation
The Growth Forecast
The Profit Margin
Long-Term Stock Appreciation
Shorter-Term Stock Appreciation
Portfolio Management Aspect
Recommendation/Summary
Reasons to Invest
Reasons to be Cautious
Recommendation
Appendix
Income Statement
Balance Sheet
Cash Flow Statement
Ratios
DCF Model
Long-Term Pricing Model
End Notes
2
Page
3
3-5
5
5
5
6
6
6
6
7
7
7-8
8
8
9
10
11
11
11-12
12
12
12-13
13
14
15
15-16
16-17
17
17-18
19
19
19
19
20
21
22
23
24
25
26
Company Overview1
International Paper Company (IP) is the world’s largest paper and forest products firm.
Products include paper, paperboard, pulp, lumber, panels, laminated products, minerals,
chemicals, and packaging products. IP is complemented by and extensive distribution
system, with primary markets and manufacturing operations in the United States, Canada,
Europe, the Pacific Rim and South America. At year-end 2004, the Company owned or
managed approximately 6.8 million
acres of forestlands in the United States,
IP 2003 Sales by Business
mostly in the South, approximately 1.5
Specialty
Businesses and
million acres in Brazil and had, through
Other
5%
licenses and forest management
Carter Ho lt Harvey
agreements, harvesting rights on
8%
P rinting Papers
government-owned forestlands in
29%
Fo rest P ro ducts
Canada and Russia. Through Carter
11%
Holt Harvey, a company that is
approximately 50.5% owned by IP, the
Distributio n
Industrial and
Company operates five mills producing
23%
Co nsumer
pulp, paper, packaging and tissue
P ackaging
24%
products, 23 converting and packaging
plants and 72 wood products
manufacturing and distribution facilities,
IP 2003 Operating Profit by Business
primarily in New Zealand and Australia.
In New Zealand, Carter Holt Harvey owns
Specialty B usinesses
or leases approximately 795,000 acres of
and Other
3%
forestlands. Foreign operations generate
Printing Papers
Carter Holt Harvey
roughly 28 percent of 2003 sales.
25%
3%
Business Segments2
IP separates its businesses into six
segments: Printing Papers, Industrial and
Consumer Packaging, Distribution, Forest
Products; Carter Holt Harvey, and
Specialty Businesses and Other.
Forest P roducts
41%
Distribution
5%
Industrial and
Co nsumer Packaging
23%
1. Printing Papers. IP is one of the world’s leading producers of printing and writing
papers. Products in this segment include uncoated and coated papers, market pulp
and bristols. Operating margins have historically been in the 6-7% range.
• Uncoated paper is used in desktop and laser copiers and digital
imaging printing as well as in advertising and promotional materials
such as brochures, pamphlets, greeting cards, books, annual reports,
and direct mail publications. Annual Production Capacity: 5.2
million tons.
• Coated paper is used in a variety of printing and publication end uses
such as catalogs, direct mailing, magazines, inserts and commercial
printing. Annual Production Capacity: 2.0 million tons.
3
•
•
Market pulp is used in the manufacturing of printing, writing and
specialty papers. Pulp is also converted into products such as diapers
and sanitary napkins. Annual Production Capacity: 2.3 million
tons.
Brazilian Paper produces coated and uncoated papers. Annual
Production Capacity: 675,000 tons.
2. Industrial and Consumer Packaging. IP’s second largest business in terms of
revenues. Operating margins have historically been in the 7-8% range.
• Industrial Packaging: IP is the third largest manufacturer of
containerboard in the U.S. with a production capacity of about 4.5
million tons annually.
• Consumer Packaging: IP is the world’s largest producer of solid
bleached sulfate packaging board. The product is used in packaging
applications for juice, milk, food, cosmetics, pharmaceuticals,
computer software and tobacco products. Annual Production
Capacity: 2 million tons.
3. Distribution. IP services the commercial printing markets with printing papers
and graphic art supplies, high traffic/away-from-home markets with facility
supplies, and various manufacturers and processors with packaging supplies and
equipment. IP operates 126 warehouse locations and 141 retail stores in the U.S.
and Mexico. A strategic necessity, however, not very profitable: Operating
margins have historically been in the 1-2% range.
4. Forest Products. IP’s largest business in terms of operating profit. Operating
margins have historically been in the 20-25% range.
• Forest Resources: IP owns or manages roughly 6.8 million acres of
forestlands in the U.S. In 2003, these forestlands supplied about 25%
of the wood fiber requirements of the other businesses. Forestlands
are managed as a portfolio to optimize the economic value to IP’s
shareholders. When stumpage prices are depressed relative to land
values, forestland sales tend to comprise a larger part of the
portfolio mix. Conversely, when stumpage prices are high,
stumpage sales may be the best alternative to maximize the value
of our forestland holdings.
• Wood Products: IP owns and operates 35 plants producing lumber,
plywood, engineered wood products and utility poles. In the U.S. IP
produces 2.4 billion board feet of lumber and 1.6 billion square feet
of plywood annually.
5. Carter Holt Harvey. IP owns approximately 50.5% of CHH. The Australasian
region accounts for about 80% of its sales. Operating margins have historically
been in the 1-3% range.
4
6. Specialty Businesses and Other. IP’s smallest business, operating margins have
historically been in the 2-5% ranges.
• Chemicals: Arizona Chemical is a leading producer of specialty resins
based on crude tall oil, a byproduct of the wood pulping process.
These products, used in adhesives and inks, are made at 13 plants in
the United States and Europe.
• Industrial Papers: Manufactures lightweight and pressure sensitive
papers and converted products with an annual capacity of 370,000
tons. These precuts are used in applications such as pressure sensitive
labels, food and industrial packaging, industrial packaging, industrial
sealants and tapes, and consumer hygiene products.
Economic Overview
Fiscal and monetary policy continue to promote economic growth. Once again lower taxrates have worked to promote faster growth, increase jobs, and raise equity values.
Consumers continue to spend and companies are producing at a 4 percent annual rate.
Wages and salaries are up 5 percent while unemployment has fallen to 5.4 percent and
weekly jobless claims hover just above 300,000. Business capital expenditures are at a
healthy 14 percent. S&P profits are up 23 percent over last year.
GDP
The U.S. economy continues its strong growth out of the 2001 recession. Real gross
domestic product increased at an annual rate of 3.8 percent in the fourth quarter of 2004,
according to preliminary estimates released by the Bureau of Economic Analysis.
Advanced estimates were calling for 3.1 percent growth. Additionally, the third quarter
real GDP figure was revised upward to 4.0 percent. The major contributors to the
increase in real GDP in the fourth quarter were personal consumption expenditures,
equipment and software, and private inventory investment.3
Energy Prices
Crude oil above $50 per barrel has become the new norm. Driven by supply concerns
and OPEC's next move, crude futures are up nearly 10 percent in the last two weeks.
With inflation remaining stable and low it appears that the economy has been able to
absorb the increases in energy prices thus far. Future expectations seem to rest on
demand namely from China and supply primarily from the Middle East. To this end, the
Middle East is making positive advances towards peace and stability. The Iraqi election
went much better than expected, Egypt is considering elections for the first time in over
50 years and Syria is pulling out of Lebanon and is becoming more amenable to U.S.
policy. A continuation in this direction will bring an increased stability in this oil rich
region, investment will increase, and capacity will be added. For example, last week
Shell Oil committed to $6 billion of investment in Qatar.4
5
Inflation and Interest Rates
The Consumer Price Index for All Urban Consumers increased 0.2 percent in January and
was 3.0 percent higher than in January 2004. CPI excluding food and energy is at a low
1.9 percent annual rate. The treasury yield curve continues to be positively sloped
indicating future economic growth, however, it has flattened by half, which indicates less
of a future inflation problem than otherwise depicted in the financial press.5 The Fed has
publicly committed to a gradual ¼ point increase in the Fed Funds Rate.
Sector Overview
The materials sector is the smallest of the 10 S&P 500 sectors by market capitalization.
The sector is just over 3 percent of the S&P and has 32 constituents, making up nearly
$342 billion in market value.
The materials sector can be categorized as both mature and cyclical. Many of the goods
produced within the materials industries tend to be commodities, which limits margins
and profitability. Competition is intense, thus efficiency and economies of scale play a
vital role in this sector. The commodity nature of the products makes company profits
extremely dependent on raw material prices.
GDP and Commodity Prices
Generally, the materials
sector is directly correlated to
commodity prices. As the
table to the right depicts, after
the recession of 2001
commodity prices rose as
capacity was initially limited
and demand increased. The
increase in prices helps many
of the commodity producing
companies of the sector.
S & P M A T E R IA L S S E C T O R C O M P O S IT E A D J (S P -1 5 ) P r ic e 4 3 .8
1995
1996
1997
1998
1999
2000
2001
2002
2003
S to c k V a l ®
2004
2005
HI
LO
ME
CU
GR
40
30
25
46
25
34
44
5 .9 %
0 2 -0 3 -1 9 9 5
0 2 -0 4 -2 0 0 5
20
P R IC E
H I 1 6 4 4 .6 3 •
L O 4 7 5 .0 0
M E 7 7 4 .0 0
C U 1 5 2 0 .0 0
G R 2 1 .0 %
1200
800
600
0 1 -0 1 -1 9 9 9
0 2 -0 4 -2 0 0 5
400
S T E E L S C R A P U S ($ P E R G R O S S T O N ) C A S H P R IC E
HI
LO
ME
CU
GR
0 .9
0 .7
0 .6
1 .0 1
0 .5 6
0 .7 1
0 .8 9
-1 .3 %
0 2 -0 3 -1 9 9 5
0 2 -0 4 -2 0 0 5
0 .5
A L U M IN U M (C E N T S P E R L B ) C A S H P R IC E
HI
LO
ME
CU
GR
297
264
231
Currency Hedge
The sector can also be seen as a
currency hedge. A
homogeneous product across
continents, commodity
producers can be a play on
currency movements. For
example, as the dollar
decreased over the last two
years, the relative
attractiveness of a large,
international commodity
producer increased. The
2006
3 1 5 .7 6
2 0 5 .6 6
2 5 6 .7 2
2 8 8 .3 4
0 .0 %
0 2 -0 3 -1 9 9 5
0 2 -0 4 -2 0 0 5
198
C R B S P O T C O M P O S IT E IN D E X
S & P M A T E R IA L S S E C T O R C O M P O S IT E A D J (S P -1 5 ) P ric e 4 3 .8
2000
2001
2002
2003
2004
S to c k V a l ®
2005
46
44
40
HI
LO
ME
CU
GR
38
36
34
45
26
34
44
3 .6 %
32
30
28
0 2 -0 4 -2 0 0 0
0 2 -0 4 -2 0 0 5
26
P R IC E
1 .2 0
1 .1 4
1 .0 8
HI
LO
ME
CU
GR
1 .0 2
0 .9 6
0 .9 0
1 .1 8
0 .7 4
1 .0 2
0 .7 7
-6 .0 %
0 .8 4
0 .7 8
0 2 -2 9 -2 0 0 0
0 1 -3 1 -2 0 0 5
0 .7 2
U S $ IN E U R O S :M O N T H L Y
6
amount of dollars that the
commodity could sell for in Europe
increased.
P R IC E R E L A T IV E T O S & P 5 0 0 C O M P O S IT E A D J U S T E D (S P 5 A ) S to c k V a l ®
FEB 1995 = 100
B A L L C O R P O R A T IO N (B L L )
D O W C H E M IC A L C O M P A N Y (D O W )
S & P M A T E R IA L S S E C T O R C O M P O S IT E A D J (S P -1 5 )
ANNUAL RATE
+ 7 .2 %
-1 .5 %
-4 .5 %
C U M U L A T IV E
+ 9 9 .0 %
-1 4 .1 %
-3 6 .5 %
2 2 0 0 2 /2 8 /9 5 - 0 2 /2 8 /0 5
BLL
180
160
Stock Market Environment
The materials sector is made up of
defensive industries. This means
that the stocks tend to have lower
betas. In good market environments
(late 1990s) the sector greatly
underperformed the broader S&P
500 market. However, during times
1995
1996
1997
1998
1999
2000
of economic uncertainty (post 2001)
the sector tends to perform much better than the broader stock market.
130
120
100
SP5A
86
DOW
74
S P -1 5
63
54
46
39
33
28
24
2001
2002
2003
2004
Industry Overview
International Paper is a member of the Paper & Forest Products Industry within the
materials sector. Market conditions in the Paper & Forest Products Industry continue to
improve. Domestic economic activity and consumer confidence remain healthy and
inventory levels remain low. One exception may be the lumber business. Lumber prices
continue to soften and the anticipation a cooling in housing starts does not bode well for
pricing in the near term.
However, prices are escalating for nearly every major paper grade. Newsprint quotes are
currently hovering around $580 per ton, up 9% from the start of 2004. At the beginning
of 2005 pulp manufacturers raised prices by $30 per ton or 5%. A number of machine
shutdowns in late 2004 has tightened supply for pulp, by far the most volatile of all the
paper grades in terms of pricing. Consequently, the latest price increase has a good
chance of sticking. In the packaging business, prices for linerboard have increased by
more than 25% over the past year. However, in January IP announced that it would not
hike coated paper prices by the expected 7% in January.6
Capacity Reduction Trend
The major paper companies appear committed to reducing or eliminating their output.
Canadian paper and lumber giant Domtar recently announce plans to shut down the pulp
mill, a paper machine, and a sheeter at its Cornwall, Ontario mill. This will reduce its
annual pulp and paper capacity by 150,000 and 80,000 tons, respectively. AbitibiConsolidated cut its newsprint production by roughly 430,000 tons in 2004. Bowater
eliminated close to 200,000 tons of capacity last year. MeadWestvaco trimmed roughly
1,000 jobs and closed several paper machines in 2004. In addition, global pulp producers
took more than half a million tons of downtime in the fourth quarter of 2004. U.S. paper
and paperboard production totaled around 88 million tons in 2003, a volume decline of
nearly 10% since 1999.7
7
2005
More specifically, International Paper excited the specialty papers market in 2004, and
has reduced its North American printing and publishing papers capacity by more than
10% of the past year.8
CapEx Trend
The major paper companies are revamping their existing machinery to produce more
value-added, less commodity-based paper products. Capital spending for the 15 largest
publicly traded U.S. paper companies advanced by about 6% in 2004 and is expected to
rise at an even greater rate this year.9
Company Outlook
The last four years have been especially difficult for International Paper. The company
has lost roughly one-third of its value. Operating cash flows are down 25% from there
2000 levels.
While the combined effects of restrained capacity growth and improving demand have
resulted in more pricing power for producers, due to contractual arrangements and, in
some cases, prices protections, implementation of price hikes has been slow. Increases
that were announced in June/July were not accomplished until October/November.
Additionally, rising input costs, including energy, chemicals, and fiber, couple with
commodity price deflation have
IP's Operating Margins
prevented operating margins from
18%
growing as much as analysts
16%
previously expected.
14%
10%
8%
6%
4%
2%
0%
2000
80
60
2001
2002
2004E
Natural Gas Consumption Down 33% since
2002
6.47
5.8
60
45
40
2003
3.46
7
6
5
40
4
3
2
20
1
The company has been aggressively
paying down debt and strengthening
0
0
2002
2003
Natural Gas Consumed
8
2004
Natural Gas Cost per unit
$/MMBTU
Thus far, these cost-savings
initiatives have yielded $500 million
- $600 million out of a targeted $2.3
billion is savings. Greater savings
should be realized in the coming
quarters as these initiatives continue
to gain traction.10
12%
Trillion BTUs
However, International Paper’s
management has made cost cutting
projects a top priority. Since 2002,
the Company has taken numerous
steps to cut the costs out of
operations. These include
automating processes, reducing
headcount, and cutting energy
consumption.
its balance sheet. In the first nine months of 2004 IP reduced long term debt a net of
roughly $1 billion.11 The Company is targeting $3 billion in total debt reduction to $12
billion gross debt by end of 2006.
To this end, IP plans to use the proceeds from the pending sales of its Fine Papers
business to Mohawk Paper Mills, and Weldwood, the Canadian subsidiary, to repay debt.
The Canadian Competition Bureau has raised some issues regarding the Weldwood
transaction, however, it is expected to go through. Further deleveraging may be
accomplished with the use of cash from operations and the repatriation of some of IP’s $1
billion in offshore cash. The Homeland Investment Act, which was passed in October,
allows U.S. firms to repatriate funds at a more favorable tax rate (5.25% versus 35%
previously).12
Winning with Customers
Increasing strength in the U.S. and
world economies along with
increasing business activity at many of
IP’s customers are increasing
expectations for the Company. Given
the generally low levels of inventories
in the industry, along with better order
of backlogs, IP has implemented price
increases in containerboard, uncoated
free sheet, pulp and certain bleached
board grades.
Pulp & Paper Prices Rising
With the passing of the downturn
International Paper
finds itself in an
1995
25
enviable position.
20
Capacity is constrained
15
while demand is
increasing. In this
10
scenario pulp prices
5
should continue higher
0
creating higher margins -5
for IP. To the right you
-10
see the direct
-15
correlation pulp prices
8
have with GDP. With
additional capacity
7
expected to be limited,
6
it seems that demand
will be the key
5
determinant of price.
Rank Order
by IP Sales
Revenue
11
7
13
12
4
6
1
2
9
FedEx/Kinko's
National Envelope
Home Depot
Altria
Xerox Corp.
Perseco
Staples, Inc.
RR Donnelly
Cenveo/Mail-Well
2004 vs. 2002
Revenue
Change
320%
50%
40%
30%
30%
30%
20%
10%
10%
StockVal®
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
HI
LO
ME
CU
2006
29.0
-14.1
0.9
7.9
03-31-1995
01-31-2005
PPI:PULP, PAPER & PRODUCTS EX BLDG PAPER BOARD YTY % CHANGE
HI
LO
ME
CU
7.1
2.7
5.7
6.4
4
3
2
03-31-1995
12-31-2004
9
GROSS DOMESTIC PRODUCT ($BIL) YTY % CHANGE
Maintaining Financial Discipline
IP management is focused on
optimizing the allocation of capital.
Management is committed to
maintaining capex at 75-85% of
depreciation over a cycle (1.2-1.4
billion per year), and continues to
allocate capital to those businesses
with highest returns. To this end,
IP has significantly rebalanced its
portfolio of businesses. Below you
will find the businesses in which IP
is exiting and investing.13
2005 Cape x $1.4 billion
Regulatory,
10%
Maintenance,
30%
Exiting
Investing
Completed
Pending
CHH Tissue
Fine Papers
Minor European
assets
Industrial
Papers
CHH Forests
(25%)
Weldwood Canada
Productivity &
Cost, 45%
Grow th, 15%
Maine/NH
Timberlands
Completed
Pending
Box USA
Brazil
pulp/paper
mill
Eastern Europe
capex
Eastover capex UFS
IP is looking both toward less commoditized markets and overseas for growth.
Specifically, IP is investing in emerging economies such as Eastern Europe, Latin
America with a focus on Brazil, and Asia with a focus on China. Margins are much
higher in these less competitive regions. IP has established itself in these markets, has a
proven track record, and competent management in the regions.
Higher Returns Outside U.S.
2004 data
100%
80%
20%
25%
80%
75%
Capital Employed
Sales
40%
60%
40%
20%
60%
0%
North America
10
Non-North America
EBIT
Risks
There are risks in owning shares of IP. An obvious risk may be an increase in pulp
supply as prices increase. However, industry margins are still relatively low and
companies are still correcting for the overcapacity of prior years. Additionally, bringing
mills back online is an expensive and time intensive matter. Margins will have to
improve before supply increases.
Higher energy and chemical costs are another potential threat. IP has done well to cut its
natural gas usage and streamline its operations; however, if energy prices continue to rise
they will no doubt eventually impact IP’s and the rest of the economy’s bottom line.
The firm does have a large debt exposure. Long term debt to equity stands at 1.8. On a
peer group comparison, the Company has a debt load that would be considered fairly
high.
Finally, higher pension expenses are concern to IP. As of the end of 2003, IP had
roughly $6.4 billion in pension assets and obligations of $7.9 billion.
Financial Statement Analysis
A full set of financial statements and a supplemental “Ratio Page” provided at the end of
this report. The following is a summary of some of the key points:
For the full-year 2004, IP reported net income from continuing operations of $478
million or $0.98 per share, as compared to net income of $294 or $0.61 per share for the
year 2003. Revenue for full-year 2004 totaled $25.5 billion, as compared to $24.0 billion
for full-year 2003.
Profitability Measures
By all accounts International Paper lags the industry in most profitability measures.
Operating margins, EBITD margin and net margins all lag the industry by a significant
amount.
Profitability Ratios (%)
Gross Margin for Trailing 12-mo
Gross Margin for Past 5 Years
Operating Margin for Trailing 12-mo
Operating Margin for Past 5 Years
EBITD Margin for Trailing 12-mo
EBITD Margin for Past 5 Years
Pretax Margin for Trailing 12-mo
Pretax Margin for Past 5 Years
Net Margin for Trailing 12-mo
Net Margin for Past 5 Years
IP
44.0
55.8
5.8
3.2
10.4
8.6
2.9
0.6
2.1
0.7
11
Industry
29.9
33.1
8.4
8.6
13.7
14.4
6.3
6.4
4.8
4.7
Sector
27.6
28.2
10.7
9.0
15.4
15.1
9.3
7.3
7.2
5.2
S&P
500
46.2
45.7
22.0
18.3
22.2
20.4
18.4
17.1
14.0
11.4
However, the important point in these data is the improvement that IP is making. At the
margin, IP is dramatically increasing its profitability ratios. The difference between the
trailing 12-month and the 5-year numbers are remarkable. The same can not be said for
the industry.
Management Effectiveness Ratios
Common measures of management’s effectiveness are not impressive, on a relative basis
to the industry. However, at the margin things appear to be improving at IP. Again, the
difference between the trailing 12-month and the 5-year numbers are notable. The same
can not be said for the industry.
Management Effectiveness Ratios
(%)
Return of Assets for TTM
Return on Assets for Past 5 Years
Return on Investment for TTM
Return on Investment for Past 5 Years
Return on Equity for TTM
Return on Equity for Past 5 Years
IP
1.6
0.6
1.9
0.7
5.9
0.7
Industry
4.4
4.3
5.8
5.9
11.9
11.5
S&P
500
7.6
6.6
11.5
10.5
20.0
18.7
Sector
6.3
4.1
8.0
5.2
17.5
10.5
Financial Strength
Common financial ratios offer a mixed bag. IP does carry a relatively large amount of
debt but is not in any kind of immediate financial crisis. In fact, IP has $2.6 billion in
cash and almost $10 billion in current assets.
Financial Strength
Quick Ratio
Current Ratio
Total Debt to Equity
Long Term Debt to Equity
Cash Flows
Given the consensus analyst
growth rate of 5%, the
current market valuation
and a cost of equity of
9.5%, future operating cash
flows are expected to be
$832 million or about the
average of the past 4 years.
However, examining
historical stock price data,
operating cash flows, and
assuming the cost of equity
a constant 9.5% one can
conclude that the “Market’s
Expectation of Growth has
IP
1.1
1.9
1.8
1.7
Industry
0.8
1.4
1.2
1.0
S&P
500
1.2
1.7
0.8
0.6
Sector
1.2
2.0
0.9
0.8
International Paper
(millions)
FY04E
Net Income Reported
Accounting Adjustment
Net Income Adjusted
Depreciation & Amort
Cash Flow Adjusted
Capital Expenditures
Free Cash Flow Adjusted
Dividends Common
Free Cash Flow After Dividends
Net Cash From Operations
Net Cash From Investing
Net Cash From Financing
Other Cash Flows
Change in Cash & Equiv
Free Cash Flow (OCF - CapEx)
Average Stock Price ($/sh)
Average Market Capitalization
Market's Expectation of Growth*
FY03
1,200
FY02
302
82
384
1,644
2,028
1,166
862
481
381
FY01
(880)
1,420
540
1,587
2,127
1,009
(1,204)
1,619
415
1,870
2,285
1,049
142
958
1,100
1,916
3,016
1,352
1,118
483
635
1,236
482
754
1,664
450
1,214
2,032
1,822
(1,267)
591
143
1,289
2,094
(480)
(1,732)
(32)
(150)
1,714
459
(2,098)
(49)
26
2,430
(4,914)
3,394
(165)
745
832
656
38
18,438
5.9%
1,085
38
18,422
5.9%
665
37
17,819
5.8%
1,078
55
24,750
6.8%
5% = current analysts growth rate
12
FY00
historically been between 5.8 and 6.8 percent. The table below confirms this conclusion.
It does appear that the historical average growth rate estimate is higher than the current
estimate (7% vs. 5%).
IN TER N ATIO N AL PAPER C O M PAN Y (IP) Price 39.6
1995
1996
1997
1998
1999
2000
2001
2002
StockVal ®
2003
2004
2005
2006
11
10
9
HI
LO
ME
CU
8
7
11.00
3.60
7.00
5.00
6
5
4
03-03-1995
03-04-2005
3
G R O W TH R ATE ESTIM ATE
7.0
5.6
4.4
HI
LO
ME
CU
3.4
2.6
6.86
0.96
5.10
2.51
2.0
1.6
1.2
1.0
03-03-1995
03-04-2005
0.8
FEDERAL FU N D S RATE %
The above graph not only shows that the current growth estimate is low relative to the
average; it also demonstrates that the growth rate is directly correlated with interest rates.
This is to be expected as commodity prices increase with the ripple of inflation through
an economy. As inflation expectations increase, on a normal basis IP’s growth rate
should also increase. The chart shows a clear 3-6 month lag from the time the fed funds
rate changes and the time the growth estimate is revised. The recent increase of the fed
funds rate supports an increasing growth rate estimate.
Forecasted Earnings
Current 2005 earnings estimates of $2.09 assume an adjusted profit margin of
approximately 3.76% (see income statement of page 19). This profit margin estimate is
right at current levels (2.6). The question at the margin becomes how this report’s
estimate of profit margins differs from the market’s 3.76 percent assumption.
13
IN T E R N A T IO N A L P A P E R C O M P A N Y (IP ) P r ic e 3 9 .6
1995
1996
1997
1998
1999
2000
2001
S to c k V a l®
2002
2003
2004
2005
2006
8 .0
7 .6
7 .2
6 .8
6 .4
6 .0
5 .6
HI
LO
ME
CU
5 .2
4 .8
7 .6
1 .2
2 .0
2 .6
4 .4
4 .0
3 .6
3 .2
2 .8
2 .4
2 .0
1 .6
0 3 -3 1 -1 9 9 5
1 2 -3 1 -2 0 0 4
1 .2
N E T P R O F I T M A R G IN A D J U S T E D %
Valuation
Upon initial examination of basic multiples the valuation of International Paper appears
mixed. On a price-to-forward EPS and price-to-EBITDA the stock looks slightly
undervalued relative to its historical past. However, on a price-to-sales and price-to-cash
flow basis the stock is hovering close to its historical averages
INTERNATIONAL PAPER COMPANY (IP) Price 39.6
1995
1996
1997
1998
1999
2000
2001
2002
StockVal®
2003
2004
2005
HI
LO
ME
CU
36
24
12
2006
47.8
6.3
21.0
18.0
03-03-1995
03-04-2005
0
PRICE / YR-FORWARD EPS ESTS
HI
LO
ME
CU
12
8
4
12.6
2.7
6.4
6.0
03-03-1995
03-04-2005
0
PRICE / EBITDA
HI
LO
ME
CU
0.8
0.99
0.44
0.73
0.74
0.6
03-03-1995
03-04-2005
0.4
PRICE / SALES
HI
LO
ME
CU
12
9
6
12.6
4.1
8.3
8.2
03-03-1995
03-04-2005
3
PRICE / CASH FLOW ADJUSTED
At the margin, the recommendation to Buy and Hold International Paper comes down to
future growth estimates and the rate profitability from that growth. This report has
outlined the market’s expectations:
Market Earnings Growth Forecast: 5.0%
14
Market Profit Margin Forecast: 3.76%
The Growth Forecast
As mentioned previously, the current growth rate estimate is low on a historical level.
Additionally, although the growth estimate does lag three to six months, in a rising
interest rate environment it should increase. This report suggests that the future earnings
growth rate will be closer to the long-term average of 7 percent.
Longer term, the company appears focused on investing capital in higher growth markets
and diversifying its product portfolio. To this extent, IP is aggressively pursuing Asia,
Brazil and Eastern Europe while at the same time investing less commoditized products
like Box USA. Additionally, the economic environment remains strong as the progrowth policies of Bush and Greenspan take hold. IP’s revenue growth should continue
as the company climbs out of the lows of 2002. Conservatively, this report suggests
longer-term revenue growth at 2.5 percent, just below the historical average.
IN T E R N A T IO N A L P A P E R C O M P A N Y ( IP ) P r ic e 3 9 .6
1995
1996
1997
1998
1999
2000
2001
S to c k V a l ®
2002
2003
2004
2005
2006
24
21
18
15
12
9
HI
LO
ME
CU
6
2 1 .9
- 1 2 .2
2 .7
3 .5
3
0
-3
-6
-9
-1 2
0 3 -3 1 -1 9 9 5
1 2 -3 1 -2 0 0 4
-1 5
REVENUES YTY % CHANGE
The Profit Margin
It now comes down to how efficient will IP be in converting revenues into profits?
Through the downturn profit margins have contracted to the 1-2% range. However, in
the 1990s profit margins fluctuated in the range of 2-9%. The question becomes, how
will IP’s margins compare to the 3.76% market forecast?
First, it is important to note that the higher energy costs have hurt IP’s margins.
However, the industry is in the process of responding with price hikes on paper products.
In fact, this correlation between paper prices and energy is easy to see. Below you will
see a graph that shows the prices of paper products vs. natural gas prices vs. IP profit
margins.
15
INTERNATIONAL PAPER COMPANY (IP) Price 39.6
StockVal®
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
171
162
HI
LO
ME
CU
GR
153
144
135
126
169.20
120.50
145.30
168.40
2.0%
02-29-1988
01-31-2005
117
PPI:PULP, PAPER & PRODUCTS EX BLDG PAPER BOARD
10
HI
9.77 •
LO
1.05
ME
2.31
CU
6.75
GR 10.0%
6
4
2
04-06-1990
03-04-2005
1
NATURAL GAS ($ PER MMBTU) NF
10
8
HI
LO
ME
CU
6
4
2
8.9
1.2
2.3
2.6
03-31-1988
12-31-2004
0
NET PROFIT MARGIN ADJUSTED %
It is clear that the industry has adjusted to the higher energy prices by raising paper
prices. Previously announced paper increases by IP continue to be implemented.
Additionally, IP’s 2005 price increases will take full effect later in the year. Meanwhile,
margins have stabilized at around 2 percent.
The worst seems over as the industry has cut production and capacity, inventory has been
worked off and energy prices may have reached a top. One notable point, energy prices
do not necessarily need to fall in order for IP to make money. They could simply stay
constant. IP has adjusted its cost structure through a decrease in energy consumption and
plant closures and divestitures. Margins would again begin to expand to the 3-4% range
with IP’s planned growth and cost reduction strategy.
Longer-term it seems prudent to assume that energy prices will not be at their historical
highs. Energy companies will not continue to have historical margins and profits. New
supply will likely enter the global market. Therefore, it is rational to expect IP’s longerterm margins to expand to the 4-6% range.
Longer-Term Stock Appreciation
It seems more appropriate and thorough to take a longer term view on the stock price. IP
shares (like those of most other paper and forest products companies) are generally not
well suited to DCF valuation given the highly cyclical nature of the company’s operating
business. Therefore, this section begins with a 5-yr forecast (the full model can be found
on page 24).
Key Assumptions:
LT Revenue Growth Rate = 2.5%
LT Profit Margins =5.0%
16
Revenue
Growth Rate
PE Ratio of Market = 18
Relative PE Ratio = 1.1
Sensitivity Analysis: Predicted Annual Rate of Return
Profit Margins
12% 3.00% 4.00% 5.00% 6.00% 7.00%
1.005
0%
6%
10%
14%
18%
1.015
1%
7%
11%
15%
19%
2%
8%
17%
20%
1.025
12%
1.035
3%
9%
14%
18%
21%
1.045
4%
10%
15%
19%
22%
At the conservative 2.5% revenue growth rate and profit margins of 5% IP would have a
fiver-year annual rate of return of 12%. The key is that if margins increase to the
achievable 6-7% range then IP would produce rates of return greater than the overall
market average. The downside is rather limited given the overall bearish outlook of the
materials sector.
Shorter-Term Stock Appreciation
On a current year basis, IP shares are trading at price/earnings levels of 18-times 2005
estimates and 14-times 2006 estimates, at the lower-end of the historical trading range.
Based on earnings estimates of 2.09 and the historical PE of 20, a logical one-year price
would be around $42 per share. This would results in roughly a 10 percent return.
Portfolio Management Aspect
It is also important to examine how
this action fits with the overall SIM
portfolio. Currently, Fisher SIM
portfolio weighted 3.15% in materials
relative to the S&P’s 3.09%. The
current holdings include 65%
container and packaging (Ball Corp.)
and 35% chemicals (Dow Chemical).
Chemicals
35%
Container &
Packaging
65%
We are recommending selling the entire Ball Corporation position bringing container &
packaging to 0%, while
maintaining the current Dow
Paper & Forest comprises over 15% of the materials sector
Paper and Forest
Chemical position. While overall,
Products, 15.2%
we recommend to underweight this
sector due to the improving stock
market environment and the
Metals & Mining,
bottoming of the dollar, it is
22.6%
appropriate to accurately represent
Construction
the S&P 500 benchmark.
Material, 1.7%
Chemical, 54.8%
Container &
Packaging, 5.7%
17
With this in mind, IP is an extremely timely choice to the overall portfolio. On a multiple
basis, IP seems attractively valued relative to the materials sector. All multiples are
below their long running averages:
INTERNATIONAL PAPER COMPANY (IP) Price 39.6
1995
1996
1997
1998
1999
2000
2001
2002
StockVal®
2003
2004
2005
2006
HI
LO
ME
CU
3
2
1
0
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P MATERIALS SECTOR COMPOSITE ADJ (SP-15) M-Wtd
3.50
0.77
1.65
1.19
03-03-1995
03-04-2005
HI
LO
ME
CU
1.2
0.8
1.67
0.57
0.87
0.75
0.6
03-03-1995
03-04-2005
0.4
PRICE / EBITDA RELATIVE TO S&P MATERIALS SECTOR COMPOSITE ADJ (SP-15) M-Wtd
HI
LO
ME
CU
0.7
0.80
0.52
0.63
0.57
0.6
03-03-1995
03-04-2005
0.5
PRICE / SALES RELATIVE TO S&P MATERIALS SECTOR COMPOSITE ADJ (SP-15) M-Wtd
HI
LO
ME
CU
1.0
1.16
0.60
0.87
0.78
0.8
0.6
PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P MATERIALS SECTOR COMPOSITE ADJ (SP-15) M-Wtd
03-03-1995
03-04-2005
Additionally, within the paper and forest products industry, IP looks attractive.
INTERNATIONAL PAPER COMPANY (IP) Price 39.6
1995
1996
1997
1998
1999
2000
2001
2002
StockVal®
2003
2004
2005
HI
LO
ME
CU
1.4
1.2
2006
1.44
0.90
1.11
0.91
1.0
03-03-1995
03-04-2005
0.8
PRICE RELATIVE TO PAPER & FOREST PRODUCTS (097A) E-Wtd
HI
LO
ME
CU
3
2
1
12.47
0.81
1.17
0.96
03-03-1995
03-04-2005
0
PRICE / YR-FORWARD EPS ESTS RELATIVE TO PAPER & FOREST PRODUCTS (097A) E-Wtd
HI
LO
ME
CU
1.6
1.2
0.8
2.18
0.77
1.22
1.11
03-03-1995
03-04-2005
0.6
PRICE / EBITDA RELATIVE TO PAPER & FOREST PRODUCTS (097A) E-Wtd
HI
LO
ME
CU
7
6
9
5
6
5
5
03-03-1995
03-04-2005
4
ENTERPRISE VALUE RELATIVE TO PAPER & FOREST PRODUCTS (097A) E-Wtd
18
Recommendation/Summary
Reasons to Invest
Output prices are increasing throughout the industry and IP is leading the way. Overall
capacity is down. U.S. paper and paperboard production totaled around 88 million tons
in 2003, a volume decline of nearly 10% since 1999. However, GDP is growing strongly
out of the 2001 recession. Meanwhile, management is committed to reducing gross debt
by $3 billion by the end of 2006. Capital expenditures are being carefully targeted to
high growth product markets domestically and emerging markets internationally.
Management’s hard work seems to be paying off as IP’s financial ratios show an
improving trend.
IP seems attractively valued given the bottoming of margins and a pick up in growth.
Additionally, a decline in energy prices would add a further benefit not accounted for in
the market. IP is also a strategic fit within the SIM portfolio. Selling Ball Corporation
leaves the portfolio under represented in materials. IP is part of a significant industry
(15% of the materials) and is attractively valued on a multiple basis vs. its peers.
Finally, while the improving economic and market conditions are not a relative positive
for the materials sector, IP is insulated in a rising interest rate environment. In fact, IP’s
stock price has an insignificant R-square of .07 when regressed over 3-mo T-bills.
Reasons to be Cautious
IP is not dramatically undervalued and the fact is it may not out perform the
technology/financial driven S&P 500. Capacity in the industry could come back online
when margins return. Finally, much depends on management’s ability to drive growth in
emerging markets and continually push towards less commoditized products offerings.
Recommendation
It is recommended that the SIM portfolio buy 4,000 shares of IP or just under 1% of the
total portfolio. This action, combined with the selling of Ball Corporation, would bring
the material sector representation to 2% of the overall SIM portfolio. This 100 basis
point underweight position corresponds with our pessimistic view of the sector.
19
APPENDIX
Income Statement:
Fiscal Year End Dec. 31
FY03
Nine Months Ended 9/30 Restated as of
2004
2003
FY02
FY01
FY00
FY99
12/31/04
18,945
17,821
23,955
24,976
26,363
28,180
24,573
= Estimates
International Paper
(millions)
Revenues
FY05E
FY04*
26,995
25,532
Cost of Products Sold
SG&A
Depr & Amort and cost of timber harvested
Distribution expenses
Taxes other than payroll and income taxes
Restructuring and other charges
Insurance recoveries
Net (gains) losses on sales and
impairments of businesses held for sale
Merger integration costs
Reversals of reserves no longer required, ne
Interest expense (net)
Earnings before Inc Tax
Income tax (benefit)
Minority interest expense, net
Earnings before Extraordinary Items and
Cumulative Effect of Accounting Changes
19,550
2,097
1,644
1,120
261
274
(147)
19,013
1,984
1,555
1,059
247
259
(139)
14,108
1,472
1,154
786
183
192
(103)
13,237
1,452
1,148
736
187
197
18,256
2,046
1,587
1,098
249
695
19,409
2,279
1,870
1,105
265
1,117
20,082
2,283
17,960
2,083
93
(26)
675
88
(24)
765
65
11
(18)
568
(17)
585
-
(41)
68
783
629
42
17
929
938
611
1,453
746
538
285
292
371
(1,265)
723
448
438
-
206
-
168
49
(64)
90
(113)
111
(54)
130
(270)
147
1,016
478
321
259
294
295
(1,142)
(513)
(525)
21
-
(46)
-
-
5
(1,175)
-
(16)
Extraordinary item - net loss on sales and
impariments of businesses held for sale,
net
Discontinued Operations, net
Cumulative effect of accounting changes, net
Asset retirement obligations
-
(10)
-
-
(10)
(3)
-
Variable interest entities
Transitional goodwill impariment charge
Derivatives and hedging activities
-
-
Net Earnings
Common Shares Outstanding
EPS before extraordinary items and
cumulative effect of accounting changes
Extraordinary Item
Discontinued Operations, net
Asset retiremnet obligations
Variable interest entities
charge
Derivatives and hedging activities
486
$
$
$
$
$
$
$
EPS-basic
Sales Increase
Gross Margin
Profit Margin
EBIT/Revenue (Pre Tax Margin)
Profit Margin Adjusted
COPS/Sales
SG&A/Sales
Depr & Amort/Sales
Distribution expenses/Sales
Taxes other than payroll and income taxes/S
Restructuring and other charges/Sales
Insurance recoveries/Sales
Net (gains) losses on sales and
impairments of businesses held for sale
Merger integration costs/Sales
Reversals of reserves no longer required, ne
Interest Expense/Sales
-
$
$
$
$
$
$
$
2.09 $
(35)
(204)
254
302
(880)
(1,204)
142
183
486
485
479
485
485
482
450
416
$
$
0.61 $
$
0.61 $
$
(2.37)
(0.10)
$
$
$
$
(0.02)
(0.01)
-
(2.42)
-
(0.03)
0.32 $
0.44
0.98
(1.06)
-
$
$
$
$
$
$
$
(0.07) $
0.66
(1.08)
-
$
$
$
$
$
$
$
(0.42) $
0.54
0.01
(0.02)
-
0.53 $
5.38%
3.76%
72.42%
7.77%
6.09%
4.15%
0.97%
1.01%
-0.54%
6.58%
25.53%
-0.14%
2.92%
1.87%
74.47%
7.77%
6.09%
4.15%
0.97%
1.01%
-0.54%
6.31%
25.53%
-1.08%
2.84%
1.69%
74.47%
7.77%
6.09%
4.15%
0.97%
1.01%
-0.54%
25.72%
1.43%
1.60%
1.45%
74.28%
8.15%
6.44%
4.13%
1.05%
1.11%
0.00%
0.34%
0.00%
-0.10%
2.50%
0.34%
0.00%
-0.10%
3.00%
0.34%
0.00%
-0.10%
3.00%
0.06%
0.00%
-0.10%
3.28%
27.58%
20
$
$
$
$
0.62 $
-4.09%
1.26%
1.22%
1.23%
$
$
$
$
(1.82) $
(2.50) $
-5.26%
26.91%
-3.52%
1.49%
1.18%
73.09%
8.19%
6.35%
4.40%
1.00%
2.78%
0.00%
-6.45%
26.38%
-4.57%
-4.80%
14.68%
28.74%
0.50%
2.57%
26.91%
0.74%
1.82%
73.62%
8.64%
7.09%
4.19%
1.01%
4.24%
0.00%
71.26%
8.10%
73.09%
8.48%
-0.16%
0.00%
0.27%
3.14%
2.39%
0.16%
0.06%
3.52%
3.33%
2.49%
Balance Sheet:
International Paper
(Millions)
Assets
Current Assets
Cash & Equivalents
Accounts and notes receivable
Inventories
Assets of businesses held for sale
Other
Total Current Assets
30-Sep
2004
FY04*
FY03
FY02
FY01
FY00
FY99
2,596
2,982
2,653
383
869
9,483
1,828
3,239
2,687
1,370
867
9,991
2,363
2,894
2,983
1,074
2,780
2,879
1,224
2,778
2,877
1,198
3,456
3,294
453
3,227
3,203
1,097
9,337
1,005
7,738
1,276
8,155
2,318
10,266
358
7,241
PP&E
Plant & Equipment
Less accumulated depreciation
PP&E, net
13,333
13,182
31,899
17,624
14,275
32,264
18,097
14,167
30,980
16,364
14,616
21,141
16,132
15,786
14,381
Other Assets
Forestlands
Investments
Goodwill
Deferred charges and other assets
Total other assets
3,936
679
4,988
1,859
11,462
3,906
671
5,030
1,863
11,470
4,069
773
5,341
1,730
11,913
3,846
227
5,307
2,507
11,887
14,406
15,711
8,646
Total Assets
34,278
34,643
35,525
33,792
37,177
42,109
30,268
506
2,087
2,294
2,014
957
1,793
2,115
2,145
920
1,870
110
4,317
4,933
615
2,208
470
838
1,822
5,953
2,422
6,803
2,565
4,579
2,591
5,341
3,126
7,386
1,592
4,382
Long-Term Debt
14,131
14,434
13,450
14,847
14,262
14,453
9,325
Other Noncurrent Liabilities
Deferred income tax liabilities--noncurrent
Other noncurrent obligations
Total Long-Term Liabilities
1,700
3,712
19,543
1,251
3,553
19,238
1,598
3,637
18,685
1,765
3,778
20,390
3,339
2,669
20,270
4,699
2,182
21,334
3,344
1,332
14,001
1,548
1,599
1,800
1,449
1,275
1,355
1,581
485
6,500
3,082
(140)
485
6,493
3,260
(219)
484
6,465
4,622
(105)
484
6,501
6,308
(117)
415
4,078
6,613
(63)
Liabilities & Shareholders' Equity
Current Liabilities
Notes Payble & Long-term debt due within one yr
Accounts payable
Accrued payroll and benefits
Liabilities of businesses held for sale
Other accrued liabilities
Total current liabilities
Minority Interest in Subsidiaries
Common Stock
Paid in Capital
Retained Earngs.
Treasury Stock
Invested Capital
Other Comp.
Total Equity
Total Liabilities and Shareholders' Equity
2,562
5,692
8,254
7,853
(1,690)
8,237
(2,645)
7,374
(1,175)
10,291
(1,142)
12,034
(739)
10,304
34,278
34,643
35,525
33,792
37,177
42,109
30,268
1.53
0.99
1.39
0.94
1.65
0.92
Ratios
Liquidity Ratios:
Current Ratio (current assets/current liab)
Quick Ratio (Current Assets-Inventories)/Current L
Profitability Ratios:
ROA
ROE
Activity Ratios:
A/R Turnover Ratio (Sales over average A/R)
Inventory Turnover Ratio (COGS/Ave Inventories)
Capital Structure Ratios
Long Term Debt / Equity
1.92
1.38
1.68
1.23
1.37
0.93
1.69
1.06
-0.10%
-0.43%
-0.58%
-2.54%
0.87%
3.87%
-2.48%
-9.96%
7.12
6.18
4.98
8.44
-
8.99
6.34
Inventory/Sales
Current Assets/Sales
10.39%
37.14%
1.71
1.84
14.18%
52.74%
21
1.63
12.45%
38.98%
2.01
11.53%
30.98%
-3.04%
-10.79%
8.46
6.29
1.39
10.91%
30.93%
0.39%
1.27%
8.43
6.18
1.20
11.69%
36.43%
13.03%
29.47%
Cash Flow Statement:
International Paper
(millions)
Nine Months Ended 9/30
2004
2003
Operating Activities
Net income before changes in accounting principles
Cumulative effect of accounting chages
Depreciation, amort and cost of timber harvested
Deferred income tax benefit
Merger integration costs
Restructuring and other charges
Payments related to restructuring reserves
Reversals of reserves no longer required, net
Net (gains) loss on sales and impariments of
businesses held for sale
Extraordinary items - Net losses on sales and
impariments of businesses held for sale
Other, net
Changes in current assets and liabilities
Accounts and notes receivable
Inventories
Accounts payable
Accrued liabilities
Other assets and liabilities
Net cash from operating activities
Financing Activities
Issuance of common stock
Issuance of debt
Reduction of debt
Redemption of preferred securities of a subsidiary
CHH share repurchase
Change in book overdrafts
Purchases of treasury stock
Dividends paid
Sale of preferred securities of a subsidiary
Other
Net cash from financing activities
Effect of Exchange Rate Changes on Cash
Net change in cash
Beginning Cash
Ending Cash
22
FY02
(204)
525
1,154
1
(179)
192
(103)
254
(5)
10
1,148
(169)
(198)
197
-
(18)
(17)
32
65
204
11
269
(400)
(30)
(90)
(8)
130
(39)
(83)
(17)
1,298
Investing Activities
Invested in capital projects
Ongoing businesses
Businesses sold and held for sale
Mergers and acquisitions, net of cash acquired
Proceeds from divestitures
Other
Net cash from investing activities
FY03
1,302
302
13
1,644
(401)
298
(270)
(40)
FY01
(880)
1,175
1,587
(399)
695
(340)
(68)
(1,204)
16
1,870
(584)
42
1,117
(431)
(17)
(41)
629
256
(3)
73
(76)
100
32
(73)
(55)
(16)
127
89
199
(42)
(5)
417
300
(289)
(56)
(93)
1,822
2,094
1,714
(1,005)
-4
(28)
535
22
(1,027)
(22)
(150)
1,552
106
(812)
(703)
(305)
648
156
53
(134)
(1,166)
78
(179)
(313)
(784)
(1,267)
(480)
132
2,786
(3,762)
(158)
(122)
(364)
(95)
50
1,377
(686)
(550)
80
2,254
(839)
(550)
53
2,011
(3,017)
-
25
2,889
(4,268)
-
31
(26)
(358)
150
(102)
104
(26)
(480)
150
(102)
(33)
(169)
(482)
50
(145)
(171)
(64)
(482)
(27)
(1,583)
(114)
591
(1,732)
(2,098)
63
86
143
(32)
(49)
(535)
2,363
490
1,074
1,289
1,074
(150)
1,224
26
1,198
1,828
1,564
2,363
1,074
1,224
459
Ratios:
Profitability Ratios (%)
Gross Margin for Trailing 12-mo
Gross Margin for Past 5 Years
Operating Margin for Trailing 12-mo
Operating Margin for Past 5 Years
EBITD Margin for Trailing 12-mo
EBITD Margin for Past 5 Years
Pretax Margin for Trailing 12-mo
Pretax Margin for Past 5 Years
Net Margin for Trainling 12-mo
Net Margin for Past 5 Years
IP
44.0
55.8
5.8
3.2
10.4
8.6
2.9
0.6
2.1
0.7
Industry
29.9
33.1
8.4
8.6
13.7
14.4
6.3
6.4
4.8
4.7
Sector
27.6
28.2
10.7
9.0
15.4
15.1
9.3
7.3
7.2
5.2
S&P 500
46.2
45.7
22.0
18.3
22.2
20.4
18.4
17.1
14.0
11.4
Efficiency Ratios (TTM)
Asset Turnover
Receivables Turnover
Inventory Turnover
Revenue/Employee
Net Income/Employee
IP
Industry
0.9
9.0
6.6
$280,449
$16,865
Sector
0.9
8.6
6.9
$446,610
$38,703
S&P 500
1.0
10.3
13.3
$742,550
$99,891
1.6
0.6
1.9
0.7
5.9
0.7
Industry
4.4
4.3
5.8
5.9
11.9
11.5
Sector
6.3
4.1
8.0
5.2
17.5
10.5
S&P 500
7.6
6.6
11.5
10.5
20.0
18.7
1.1
1.9
1.8
1.7
Industry
0.8
1.4
1.2
1.0
Sector
1.2
2.0
0.9
0.8
S&P 500
1.2
1.7
0.8
0.6
Management Effectiveness Ratios
(%)
Return of Assets for TTM
Return on Assets for Past 5 Years
Return on Investment for TTM
Return on Investment for Past 5 Years
Return on Equity for TTM
Return on Equity for Past 5 Years
Financial Strength
Quick Ratio
Current Ratio
Total Debt to Equity
Long Term Debt to Equity
0.7
8.3
5.2
$307,614
$6,506
IP
IP
23
DCF Model:
International Paper
DCF Model
(millions)
Cost Of Equity
Beta
Risk Free Rate
Mkt Risk Premium
CAPM = Expected return=R(f)+beta (Mkt Prem)
# of diluted shs outstanding (mil)
Recent Price (1/12/04)
Mkt Value of Equity ($mill)
1.10
3.30%
5.31%
9.15%
485
38.29
18,578
Cost Of Debt
Cost of Debt
Tax Rate
After Tax Cost of Debt
3.55%
35.00%
2.31%
Cost of Capital
WACC
Long term rate of growth
Cost of Equity
Mkt Premium
Recent Price
Div/Sh (2003)
Long term rate of growth
K
Mkt Premium (K-Risk Free Rate)
Value of Firm using DCF method
18,578
Value of Firm using Multiples
Median P/E of:
16
2003 Earnings
4,704
2004 Earnings
7,648
2005 Earnings
16,252
7.01%
5.00%
9.48%
$
1,171.00
1.34
8.50%
8.61%
5.31%
24
or
$
38.29 per share
Long-Term Pricing Model:
1 Company Ticker
2 Company Name
3 Revenues (000,000's)
4 Net Income (000,000's)
5 Common Shares Outstanding (000,000's)
6 DPS
7 Price
8 Growth Rates in Revenue (5 yr. Forcast)
9 Ending Net Income Margin (5 yr. Forcast)
10 Ending Shares Outstanding (5 yr. Forcast)
11 Relative P/E
12 Market P/E
IP
International Paper
$
25,532.00
$
500.00
485.00
$
1.00
$
38.29
1.025
0.05
485.00
1.10
18.00
Revenue
Growth Rate
INPUTS
Sensitivity Analysis: Predicted Annual Rate of Retu
Profit Margins
12% 3.00% 4.00% 5.00% 6.00% 7.00%
1.005 -1% 5%
10% 13% 17%
1.015
0% 6%
11% 15% 18%
12% 16% 19%
1.025
1% 7%
1.035
2% 8%
13% 17% 20%
1.045
3% 9%
14% 18% 21%
EPS (last 12 months)
Target PE
Future Revenues (000,000's)
Future Net Income (000,000's)
Future EPS
Future Price
Current Yield
Returns
Return @130%of Price
Return @120%of Price
Return @110%of Price
Return @100%of Price
Return @90%of Price
Return @80%of Price
Return @70%of Price
$
$
$
$
$
5 yr. Comp. Rate Annual Return Current Price
6%
8%
10%
12%
14%
17%
20%
1.03
20
28,887.11
1,444.36
2.98
58.97
2.6%
Future Price/Curr Price
$49.78
$45.95
$42.12
$38.29
$34.46
$30.63
$26.80
25
1.185
1.283
1.400
1.540
1.711
1.925
2.200
Revenue
Growth Rate
CALCULATIONS
0.116
1.005
1.015
1.025
1.035
1.045
1.00
7%
9%
10%
11%
12%
1.05
9%
10%
11%
12%
13%
Relative PE
1.10 1.15
10% 10%
11% 12%
12% 13%
13% 14%
14% 15%
1.20
11%
12%
14%
15%
16%
1
International Paper 2003 10-K.
Ibid.
3
Bureau of Economic Analysis News: Gross Domestic Product: Fourth Quarter 2004 (Preliminary),
www.bea.gov.
4
WSJ, “Shell, Qatar Sign LGN Pact,” February 27, 2005
5
Bureau of Economic Analysis News: Consumer Price Index January 2005, www.bea.gov.
6
Value Line: Packaging and Container Industry, January 7, 2005.
7
Ibid.
8
International Paper: 10Q-amendment for period 9/30/04.
9
Value Line: Packaging and Container Industry, January 2, 2005.
10
Value Line: International Paper, January 7, 2005.
11
IP 2004 3rd quarter Cash Flow Statement.
12
Value Line: International Paper, January 7, 2005.
13
International Paper: 8-K, March 3, 2005.
2
26