Morningstar | International Paper Makes Strides In Printing Paper, Cellulose Fiber Profitability During 2018. See Updated Analyst Note from 31 Jan 2019
International Paper's year was strong across the board, meeting our expectations in corrugated packaging and cellulose fibers, and exceeding them in printing papers. In the fourth quarter, adjusted operating EPS rose 30% year on year, due to price increases outpacing cost inflation. We've modestly raised our near-term margin assumptions for both printing papers and cellulose fibers based better than expected pricing, and more stable results following the integration of Weyerhaeuser's pulp assets. As a result, our fair value rises to $50 per share from $49. Our no-moat rating is unchanged.The industrial packaging segment, which makes corrugated products, grew adjusted operating income just over 5% year on year to $646 million during the fourth quarter. With margins as high as they've been over the past decade, we think investors should be wary about their durability. With the start of 2019, we point to corrugated medium prices falling 3% in January as a sign of our long-term thesis. A few years of robust corrugated profitability has elicited a supply response that we expect to negatively impact pricing, which will narrow margins considerably in the long-run. These effects could be magnified should global shipping volumes get impacted by an increased taste for tariffs.
IP's cellulose fiber and printing paper businesses performed well in the fourth quarter. Cellulose fibers, bought from Weyerhaeuser in late 2016, has started to generate more stable results following integration into IP's network this year. We expect low-double-digit operating margins to become the norm going forward, as an aging population supports demand for incontinence products. Printing paper operating margins were also solid, at around 17% in the second half of 2018. While we think margins will compress in the long run as demand wanes, gradual capacity reductions will supported strong pricing in the near term.
International Paper is a producer of renewable fiber-based packaging, pulp and paper products with manufacturing operations in North America, Latin America, Europe, North Africa, India and Russia. The company's segments are: Industrial Packaging, which manufactures containerboard, such as linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft; Global Cellulose Fibers, which produces fluff pulp for making absorbent hygiene products like baby diapers, feminine care, adult incontinence and other non-woven products; and Printing Papers, which produces printing and writing papers, such as uncoated papers for use in copiers, desktop and laser printers and digital imaging.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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