No matter what current market conditions are at any given time, the point of value-oriented investing is to find stocks that offer attractive long-term upside. For my approach, that means using a combination of valuation, fundamental strength, and technical analysis to filter through the thousands of stocks that are available.
The market’s rally to fresh sets of all-time highs in the last few days makes it tempting to gravitate to the stocks that have been the “star performers” of the last several months. In many ways, that means working with stocks that have proven to be well-positioned to the global shift in the way daily work gets done. Remote networking, collaboration and connectivity, for example are at a real premium right now as major portions of the corporate workforce have shifted to long-term, and in some cases, permanent work-from-from arrangements, which means that the companies – by and large, operating in the Networking and Services and Software industries of the Technology sector – that offer solutions and services that make that shift possible have been at the front of the pack.
My approach to value analysis puts a big emphasis on stocks that are currently sitting at or near historical lows. In a bull market, these are stocks that have diverged from the rest of the market, and so most investors tend to shy away from these kinds of stocks. That’s why value investing can sometimes be a bit of a contrarian approach, especially at the long end of a bull market. Given the dramatic increase in stock prices since the March 2020 bear market low, a lot of people seem anxious to call this the beginning of the next bull market. That means that a naturally contrarian approach is to look at the companies on the opposite end of the spectrum – those who previously relied heavily on traditional daily working operations to fuel their own business operations and generate revenues.
International Paper Company (IP) is a good example of the kind of company that was forced to absorb a big impact at the early stage of the pandemic as traditional business activity came to a grinding halt. While remote work has enabled a lot of companies to keep going, and to keep their employees working and productive, it has also meant that the demand for goods like basic office supplies – think printer paper, for example – dropped to a mere trickle. IP is one of the biggest companies in the Containers & Packaging industry of the Materials sector, and their conservative management approach enabled them to build a healthy balance sheet leading up to 2020 that took the initial force of that downturn pretty well. The company’s last couple of earnings statements have actually shown what may have been unexpectedly strong results given broader trends that have seen revenues and earnings decline for most of the year. Along the way the stock has nearly doubled in price from a March 2020, bear market low at around $26 to its current price a little above $50 per share. That price performance might make a contrarian approach seem irrelevant, but the irony is that even with that big move, I think this is a stock that could be poised to go even higher. Let’s dive in.
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 operates through it four segments: 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. IP has a current market cap of about $19.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined nearly -35%, while revenues dropped by almost -89%. In the last quarter, earnings were -7.8% lower, while sales increased by 5.28%. The company’s margin profile is narrow, but appears to be strengthening; Net Income as a percentage of Revenues was 2.39% over the last twelve months but rose to 3.98% in the last quarter.
Free Cash Flow: IP’s free cash flow is strong at $2.17 billion. This number did drop somewhat from the end of 2019, when it was $2.33 billion; but given the broader conditions of the past year, it also isn’t unexpected. It also translates to a Free Cash Flow Yield of 10.68%, which remains healthy.
Debt to Equity: IP has a debt/equity ratio of 1.2. This is a high number that is a strong indication of the company’s highly leveraged status, but is also inline with industry averages. IP currently has a little over $678 million in cash and liquid assets (down from $1.2 billion about a year ago) against about $8.5 billion in long-term debt. The company’s operating profile, though narrow, suggests servicing their debt shouldn’t be a problem; but the decline in available cash is a concern that bears watching. Continued improvement in Net Income, along with a reversal of the downward Free Cash Flow pattern would be strong indications that liquidity is also improving.
Dividend: IP’s annual divided is $2.05 per share; that translates to an attractive yield of 3.9% at the stock’s current price. The company has maintained the dividend throughout the pandemic, with no current indications the dividend is in danger of being reduced or eliminated.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $69 per share. That means that even with the stock’s current upward trend and rise from its March low, the stock is significantly undervalued, with about 32% upside from its current price.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red line on the chart above outlines the stock’s upward trend from March 2020 to its peak at the beginning of 2021 at around $53.50; it also informs the Fibonacci retracement levels on the right side of the chart. The stock’s upward trend is clear, the stock’s current fade off of that recent peak look like a simple retracement of that trend. Immediate support is between $47 and $48 based on the stock’s consolidation in December 2020 at those levels, with immediate resistance at the peak of $53.50. A bounce off of support anywhere between the stock’s current price and $47 should give it good momentum to retest that peak, while a drop below $47 could see the stock fall to about $43 per share. If the stock breaks above its recent peak, it should have room to rally to about $57 based on the distance between the last resistance break to next resistance in November 2020.
Near-term Keys: The stock’s current bullish momentum lends a strong idea to looking for a bullish short-term trade; a bounce off of support could be taken as a good signal to buy the stock or to work with call options with an eye on $53 as a short-term profit target, and $57 providing a nice secondary target if momentum pushes the stock past its last peak. A drop below $47, on the other hand would act as a good signal to think about shorting the stock or working with put options, using $43 as a nice bearish trade target. The company’s value proposition looks very tempting, and management’s ability to ride through the past year’s difficulties with still-solid strength in its balance sheet makes IP a stock that is worth paying attention to.