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Summary of Operations
International Paper Company (IP) is one of the leading paper suppliers in America. Their core business is industrial packing (86% of 2021 revenues), whose main product is corrugated cardboard. They make about one third of the cardboard boxes that are produced in the United States. Their secondary line is the production of global cellulose fibers (GCF, 14% of revenues), which is used for absorbent products like diapers, tissues, medical supplies, and other disposables.
Omicron outbreaks disrupted operations in the fourth quarter of 2021 and increased costs.
Strategy
IP believes there is higher demand than can currently be met with packaging needs, due in large part to the rise of e-commerce and shipping of purchased goods. With such a large market share and more demand still to meet, IP is focusing on its core operations and recently spun off its printing papers business into a separate company. With its scale, IP intends to crunch its customer data and tailor products to customer needs, enhancing service on top of product.
It does not intend to reinvent the wheel, merely streamline existing operations and expand facilities to meet demand, while paying off debt and keeping its balance sheet healthy.
Growth and Future
With strong demand, there is modest growth ahead for this company. Because it is large, it is unlikely to be enormous growth, but even conservative assumptions point upward. Truly stellar growth will depend on IP’s ability to step up its productive capabilities in response to demand. While it spun off its printing papers segment, it’s telling that IP chose to retain its GCF segment, even though it operated at a loss in 2020. This suggests it sees potential in this product line that it did not see in printing papers and is worth further examination into the future.
Shareholders can still benefit from buybacks and dividends. Management currently aims for its dividend to range from 40% to 50% of free cash flow, leaving a sufficient margin of cash for other uses. Share repurchases will be done on a basis of their calculation of intrinsic value. IP currently believes it will achieve $1.5 billion free cash flow in 2022.
Miscellaneous Information
The Chairman/CEO owns about $18 million worth of the common stock.
Valuation
Growth Assumption: 6%
Intrinsic Value Per Share: $42
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