Rochester Institute of Technology
Saunders College of Business
November 11, 2011
Mayank Bindal
Rashedur Rahman
William Weintraub
Disclaimer
Most of the data, tables and charts used in this presentation
have been taken from various published International Paper
documents and outside sources, as referenced on the slides.
The sole purpose of this presentation is to synthesize the
publicly available information about International Paper and
make a recommendation on its long-term investment outlook.
2
Agenda
A. Company Overview
B. Industry Analysis
C. Financial Analysis
D. Valuation
E. Recommendation
3
A.1 The Company - Operations
•
•
A global paper and packaging company, with corporate and operational
headquarters located in Memphis, TN
Manufacturing operations in North America, Europe, Latin America, Russia, Asia
and North Africa
U.S.
•
•
•
Global
20 pulp, paper and packaging mills
8 pulp, paper and packaging mills
144 converting and packaging plants
67 converting and packaging plants
19 recycling plants
2 recycling plants
3 bag facilities
None
224 distribution branches
38 distribution branches
Business segments: Industrial Packaging, Printing Papers, Consumer Packaging,
Distribution and Forest Products
Top manufacturer of containerboard production; 70% used in industrial corrugated
boxes
Owns/manages 250,000 acres of forestland in Brazil; harvesting rights in Russia
Source: International Paper Company Website, http://www.internationalpaper.com/ data as of 12/31/10
4
A.2 The Company – Financial Overview
• Stock Symbol: IP
• Sector: Consumer Goods
• Industry: Paper & Paper Products
• International Paper’s common stock is listed on the New York, Amsterdam
and Swiss stock exchanges
• Stock Price close of the day 11/09/11: $28.07
• One Year Est. Price Target: $36.31
• Common Stock diluted EPS $1.19 ($0.92 excluding special items) in 3Q11
• 2011 nine months ended 9/30/11 net sales $20 billion ($1.1 billion
increase over 9/30/10)
Source: 1Yr Est. Target Factset 11/04/11, EPS: IP 10Q 3Q11, Executive Summary
5
A. 3 Segments & Global Portfolio
Operating Earnings
by Segments
Source: IP 3Q11 Earnings Call
Operating Earnings
by Region
6
A.4 Major Developments
•
On November 1, 2011, Carol Roberts was named Senior Vice President and CFO
•
On October 14, 2011, International Paper completed the acquisition of a 75%
interest in Andhra Pradesh Paper Mills Limited (APPM). The Company purchased
53.5% of APPM's outstanding shares from the controlling shareholders for
approximately $226 million in cash in addition to other financial arrangements.
•
On September 6, 2011, International Paper entered into a definitive merger
agreement with Temple-Inland Inc. to acquire all of the outstanding common
stock of Temple-Inland for $32.00 per share in cash, plus the assumption of
approximately $600 million in Temple-Inland's debt.
•
On June 30, 2010, International Paper completed the acquisition of SCA Packaging
Asia (SCA) for a purchase price of $202 million.
Source: IP 10Q 3Q11
7
A.5 Major Developments (Continued)
•
On June 20, 2010, International Paper completed the acquisition of SCA Packaging
Asia (SCA) for a preliminary purchase price of $205 million
•
In March 2008, International Paper agreed to acquired the corrugated packaging
business of Weyerhaeuser for $6 billion in cash
•
Since 2005, IP has completed a major restructuring of its operations:
– Under this plan, company has concentrated on uncoated papers and industrial
and consumer packaging businesses (including its distribution unit) and has
divested its other operations
Source: IP 10Q 3Q11
8
A.6 Deal Activity 2010 - 2011
Tikhvin Forestry
Temple Inland
Shorewood
Packaging
Stock Price
Andhra Pradesh
Paper
Months
Source: Factset
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A.7 Corporate Governance
RTPs
Commitment
Compensation
Board
Risk
Management Committees
Source: Source: International Paper Company Website, http://www.internationalpaper.com Proxy Report
10
A.8 Sustainability and CSR
Focus
Practices and Results
1. Promoting responsible forest
management globally
Recycling: Annually recover some 6 million tons of fiberabout 12% of total U.S. fiber collection
2. Helping customers to meet sustainability
goals
Partnership: Cooperative agreement with China (SFA)
and Brazil (Sao Paulo State Government) to support
the development of sustainable forestry
3. Partnering with stakeholders to advance
mutual sustainability objectives
4. Leveraging the inherent sustainability of
paper with innovative new product
designs
5. Eliminating life-changing injuries and
fatalities in the workplace
6. Strengthening support and participation in
the communities where IP operates
Responsible manufacturing: Invested $45 million to
improve energy efficiency, and reduced energy
consumption by 11% between 2005 and 2009
Workforce: Improved Total Incidence Rate (TIR),
diversity (32% of the total workforce are women or
minorities)
Communities: in 2010, amount exceeded $10 million
and was distributed to non-profit organizations.
Examples includes Coins 4 Kids, National Civil Rights
Museum Freedom Awards and A Walk in the Park,
etc.
Source: Source: International Paper Company Website, http://www.internationalpaper.com Proxy Report
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A.9 Risks
Industry
Market and Economic Factors
Legal Proceedings & Compliance
Operational Risks
-------------------------------- Analyst Findings -------------------------------S&P
(10/15/2011)
Qualitative :
Quantitative:
Medium
B
The Street Ratings:
(10/2/2011)
Poor debt management
Economic Investor
(10/11/2011)
IP’s Index is 128
(Better then the competitors but
below the average of Dow Jones-54,
S&P,-60 and other leading such as
Walmart-70, J&J-75)
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B.1 Industry
•
Paper products industry includes about 3,500 companies with combined total
revenue of $160 billion - fragmented
•
Major companies include Georgia-Pacific, International Paper, Kimberly-Clark,
MeadWestvaco and Neenah Paper
•
Highly cyclical and capital-intensive. Demand depends upon:
- industrial non-durable goods production
- consumer spending
- commercial printing
- advertising activity
•
Volatile product prices, IP given its size still not able to influence
timing and extent of price changes
•
Technology seems to have an impact on demand for uncoated
free sheet in long run
Source: 10K, S&P Report
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B.2 Peer Group
Company Name
INTL PAPER CO
Recent Market Cap Price/
Net Sales Net Income
Price ($)
($M)
Earnings TTM ($M) TTM ($M)
24.15
10,556
8.53 26,286.00
1,279.00
SCHWEITZER-MAUDUIT INTL INC
58.32
939
14.44
751.70
67.90
CLEARWATER PAPER CORP
34.86
803
11.43
1,658.94
72.30
SCA-SVENSKA CELLULOSA AB
12.72
7,738
9.64 17,398.68
926.86
KAPSTONE PAPER & PAKIAGING
14.37
666
7.98
829.64
84.85
GLATFELTER
13.58
621
8.43
1,560.21
74.63
MEADWESTVACO CORP
25.76
4,397
13.14
5,924.00
186.00
7.99
3,739
7.99
3,763.72
670.06
71.11
2,802
4.32
5,672.00
703.00
3.02
1,622
NM
7,273.00
(21.00)
25.03
1,002
8.18
905.34
124.27
FIBRIA CELULOSE SA
DOMTAR CORP
SAPPI LTD
BUCKEYE TECHNOLOGIES INC
Source: Street Ratings 10/2/11
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% Increase
B.3 Industry
Year
Paper and Paper Products Production – 5 Years
Source: Factset
15
% Increase
B.4 Industry
Year
Paper and Paper Products Industrial Capacity – 5 Years
Source: Factset
16
% Capacity
B.5 Industry
Year
Paper and Paper Products Capacity Utilization – 5 Years
Source: Factset
17
C.1 Credit Analysis
•
•
•
IP expects to meet projected capital expenditures, service existing debt and meet
working capital and dividend requirements during 2011 through current cash
balances and cash from operations
Net Worth:
– Maintenance Minimum Net Worth: $9 Billion
– IP Net Worth: 12.4 Billion
Debt – Capitalization Ratio:
– Requirement: Total Debt – Capitalization ratio: < 60%
– IP Total Debt – Capitalization ratio: 41.2%
Source: Morningstar
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C.2 Earnings Analysis
Earnings Per Share (EPS)
$4.00
$2.26
$3.00
$2.21
1
$2.72
0.43
0.62
0.64
0.79
0.73
2009
2010
0
$2.00
-1
$1.00
-0.52
-0.02
-2
$$(1.00)
$1.56 $1.50
$(0.07)
$(2.00)
-3
-4
$(3.00)
-5
$(3.05)
$(4.00)
2004
20
Reinvestment Rate
2
2005
2006
2007
2008
2009
2010
-4.88
-6
2003
2004
2005
15
16.48
14.89
2007
2008
IP
Industry
Current P/E
17.8
5.8
Net Profit Margin
7.8%
9.0%
ROE
19.1%
16.8%
Beta
2.62
1.52
P/B Value
1.61
1.78
2010 Price Earnings Ratio (P/E)
17.79
2006
9.87
10
5.17
5
0
Source: 10 K
19
EPS
C.3 Operating EPS
Year
Source: 3Q11 Earnings Call
20
C.4 Profitability Analysis
International Paper is superior in
profitability in 2010
Financial crisis (2008-2009) greatly
impacted profitability and liquidity
Revenues/Net Income
$30,000.00
$25,000.00
$20,000.00
$15,000.00
$10,000.00
$5,000.00
$$(5,000.00)
Source: 10 K
2007
2008
2009
2010
21
ROI
C.5 ROI
Year
Source: 3Q11 Earnings Call
22
C.6 Financial Statement Analysis
INCOME STATEMENT (12/31)
• Sales: $21.9B to $25.2B from 2007 to 2010, respectively, a 15.1% increase over
the 5-year period
• Net Income: $1.2B to $.7B from 2007 to 2010, respectively, a 41.7% decline over
the 5-year period
BALANCE SHEET (9/30/11)
• Cash & CE: $2.7B
• Long-Term Debt: $7.8B
DIVIDEND PAYOUT
• 2007: $1.00
• 2008: $1.00
• 2009: $.10
• 2010: $.50
• 2011 (Annualized): $1.05
Source: 10 K
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C.7 Financial Statement Analysis
Revenues
Net Income
$30,000.00
$1,500.00
$25,000.00
$1,000.00
$20,000.00
$500.00
$-
$15,000.00
$10,000.00
$(500.00)
$5,000.00
$(1,000.00)
$(1,500.00)
$2007
2008
2009
2010
International Paper
Domtar Corp
MeadWestvaco Corp
PH Glatfelter Company
Packaging Corporation of America
Source: 10 K
2007
2008
International Paper
MeadWestvaco Corp
Packaging Corporation of America
2009
2010
Domtar Corp
PH Glatfelter Company
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D.1 Valuation
EPS
EPS Growth %
IP EPS/Earnings Growth – 5 Years
Year
Source: Factset
25
D.2 Valuation
Broker Outlook– 1 year
Source: Factset
26
E. Recommendation - Buy
Operating
Efficiency
Corporate
Gov/
Sustainability
Earnings
Quality
$34.43
Valuation
Earnings
Management
Undervalued:
Fundamental price using discounted free cash flow approach
translates into 20% upside potential
27