IP is near its 52-week low – is it a good value as well?

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. That 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. In bearish market conditions, the number of stocks trading well below their bullish highs increases, which means that the pool of useful, value-oriented opportunities starts to increase. The caveat, for me is that a low price isn’t enough; I also need to see enough fundamental strength to make me believe the stock should be higher than it is right now.

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, and to find ways to navigate the broader economic climate ever since. 2022 only made that more difficult, as companies in every sector have dealt with inflationary conditions that have raised consumer prices as well as interest rates. 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 the pandemic-drive downturn pretty well. It has also kept the company on solid operating ground throughout the past year or so, and out to the other side. The stock has been following general market uncertainty, and specific industry-driven bearishness into a yearlong downward trend that bottomed in June at around $29 per share, and has seen the stock hover just a little above that level every since. What does that mean for the stock’s value proposition? Let’s find out.

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 $10.8 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declined by -30.25%, while revenues dropped by -4.14%. In the last quarter, earnings were a little more than -39% lower, while sales dropped by -2.2%. The company’s margin profile is showing some signs of weakening, which isn’t surprising in the current, broader inflationary environment; Net Income as a percentage of Revenues was 6.28% over the last twelve months and declined to 3.43% in the last quarter.

Free Cash Flow: IP’s free cash flow is generally healthy, at $854 million. This number has dropped from a year ago, when it was $1.14 billion; but given the broader conditions over the last year, it also isn’t unexpected. It also worth noting that this number decreased from $1.25 billion from the last quarter. The current number also translates to a Free Cash Flow Yield of 7.84%.

Debt to Equity: IP has a debt/equity ratio of .65. This is a conservative number that indicates management takes a conservative approach to leverage. IP currently has $708 million in cash and liquid assets (down from $977 billion a year ago, and $804 billion in the prior quarter) against about $5.5 billion in long-term debt. The company’s operating profile suggests servicing their debt shouldn’t be a problem; but the decline in Net Income, and in liquidity is a concern that bears watching.

Dividend: IP’s annual divided is $1.85 per share; that translates to an attractive yield of 5.89% 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 $26 per share. That means that the stock is undervalued, with about 17% upside from its current price, and a compelling discount price at around $29 per share.

Technical Profile

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 downward trend from a peak at around $45 in August to its June low at around $29; it also informs the Fibonacci retracement levels on the right side of the chart. The stock rallied a bit in June off of that 52-week low, rising to hit still-immediate resistance at around $32 that has held through multiple rally attempts in the last months as the stock has begun to consolidate. Current support is around $30, based on a pivot low in mid-June at that level. A push above $32 should have upside to about $34, and possibly $35 (where the 38.2% retracement line sits), depending on the strength of buying activity if a bullish breakout appears. A drop below $30 has limited downside, with the stock’s 52-week low at $29 waiting to provide additional, next support.

Near-term Keys: While there are some issues that bear watching, IP’s overall fundamental strength remains on pretty solid footing. I would prefer to see improvement in Free Cash Flow, Net Income and Cash before taking the stock’s value proposition seriously. If you prefer to focus on short-term trading strategies, you could use a push above $32 to buy the stock or work with call options, using $34 as a practical profit target on a bullish trade, and $35 possible if buying activity increases. A drop below $30 could be a signal the stock’s downward trend will continue to hold, however with next support at just $29, there really isn’t enough opportunity to seriously consider shorting the stock or buying put options.