No matter what current market conditions are, one of the biggest challenges for an investor is finding stocks that fit their investment preferences at any given time. The market ebbs and flows from high to low extremes, and those shifting conditions mean that investing strategies designed to work in one type of environment will offer up fewer choices and opportunities in another. Value investing is a great example; when the market has been declining for an extended period of time, or even in the early stages of recovery, finding undervalued stocks isn’t that hard to do. The longer a bull market lasts, however, the harder that becomes, as more and more stocks are found at or near historical highs, and at inflated prices relative to the stock’s underlying fundamentals.
As a value-oriented investor, I’ve learned that just because there may be fewer bargains available in the late stages of a bull market (and let’s face it, we absolutely are in the very late stages of this latest bull market), it doesn’t mean that I have to change my philosophy. It does mean that I become a more cautious and deliberate buyer, and my core fundamental and value criteria become even more important, because they help me maintain my discipline and avoid jumping on the market’s bullish bandwagon at the dangerous, “irrational exuberance” stage. I’m not sure we are at that point yet, but we also aren’t very far off from it, and so my conservative approach continues to help me sleep well at night.
International Paper (IP) is a stock that has seen an impressive increase in price since the current bull market started in early 2009 was only around $4 per share, and as of now it is trading a little above $52 per share. At first blush, that might make the stock sound more like it should be overvalued. The company has a strong fundamental profile, however, and the growth of its business over the same period lends to strong argument for the stock’s higher price. Not only that, over the course of the calendar year the stock is actually down more than 20% from its all-time high. I think there is a very strong argument to be made that at its current levels, IP looks like a pretty attractive value play right now.
The question of trade is something that practically every business with an international profile has to grapple with, as questions about tariffs continue to linger. IP released its latest quarterly report yesterday, and the CEO indicated that to this point, the company hasn’t seen any direct impacts from tariffs. Instead, IP is a company whose risk exposure to trade tensions is mostly secondary. The simplest example, which the CEO cited, was packaged food. If IP’s customers are hit with higher costs from tariffs and uncertainty from an extended trade war, they will need less packaging products, which would then impact IP’s operations. An example that counters this logic applies to China, who the CEO pointed out doesn’t make its own fiber-based products like pulp and paper, which means they have to purchase ti elsewhere. Tariffs won’t be likely to change that reality, which means that area of business should continue to perform well.
Fundamental and Value Profile
International Paper Company is a paper and packaging company with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia, Africa and the Middle East. The Company’s segments include Industrial Packaging, Global Cellulose Fibers, Printing Papers and Consumer Packaging. The Company is a manufacturer of containerboard in the United States. Its products include linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. The Company’s cellulose fibers product portfolio includes fluff, market and specialty pulps. The Company is a producer of printing and writing papers. The products in Printing Papers segment include uncoated papers. The Company is a producer of solid bleached sulfate board. As of December 31, 2016, the Company operated 29 pulp, paper and packaging mills, 170 converting and packaging plants, 16 recycling plants and three bag facilities in the United States. IP’s current market cap is $21.5 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings grew almost 57% while revenue growth was modest, increasing only 2%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; but it is also a positive mark of management’s ability to maximize business operations. The company’s Net Income for the last twelve month was almost 13% of Revenues, with this number decreasing to about 7% in the most recent quarter.
- Free Cash Flow: IP’s free cash flow is healthy, at $361 million. This is a significant increase from the last quarter, when free cash flow was a more modest $175 million.
- Debt to Equity: IP has a debt/equity ratio of 1.48, implying they are fairly highly leveraged. This is pretty normal for the Containers & Packaging industry. The company’s balance sheet indicates their operating profit are more than adequate to service their debt, with cash and liquid assets of more than $1.1 billion to provide additional flexibility.
- Dividend: IP pays an annual dividend of $1.90 per share, which translates to a yield of about 3.64% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for IP is $16.58 and translates to a Price/Book ratio of 3.17 at the stock’s current price. Their historical average Price/Book ratio is 4, which provides a strong basis for the stock’s long-term upside. A move to par with the average would put the stock above $66 per share, more than 27% higher than the stock’s current price and very near to its 52-week (and all-time) high around $67.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend from October of 2016 to late January of this year, and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock has significantly retraced that upward trend, and has used the $51 level as strong support since late March. More recently, the stock’s trading range has narrowed, with resistance around $53 and support in the same $51 price area. Its current range also sits inline with the 61.8% retracement line, reinforcing the strength of the support the stock has seen over the last few months.
- Near-term Keys: If you don’t mind working with a little volatility over time, and can tolerate a potential swing lower, the value proposition for the stock offers a great long-term opportunity with a very attractive dividend yield to draw from right now. If you prefer to work with shorter trading periods and strategies like swing or momentum trading, look for a push above $53 before taking a long position in the stock or working with call options. A drop below the stock’s current support around $51 could mark an interesting signal to short the stock or work with put options, since the stock isn’t likely in that case to find new, significant support before reaching the $46 level shown by the 88.6% retracement line.