Morningstar | International Paper Poised to Benefit from Lower Maintenance, Stronger Pricing in 2H. See Updated Analyst Note from 26 Jul 2018
International Paper's second quarter lined up with our expectations for 2018. Having made substantial progress on its integration of Weyerhaeuser's old fluff pulp assets, all three of IP's segments are now running smooth. Consolidated adjusted operating margins rose 2.2% versus the prior year to 17.8% in the second quarter, on sales of $5.8 billion. Each segment benefited from favorable pricing, which generally outpaced input cost inflation over the trailing year. We've slightly increased our fair value to $49 from $48 per share, due to time value of money effects. Our no-moat rating is unchanged.The industrial packaging segment remains IP's primary value driver, with adjusted operating income rising to $569 million from $421 million a year ago. Despite cost inflation from higher freight rates and increased chip prices, higher prices easily outpaced these headwinds. Margins should improve further in the third and fourth quarters as maintenance costs fall and additional price increases are realized in existing supply contracts. However, we still see margin pressures on the horizon for this segment primarily due to lower prices. Although IP currently benefits from higher prices due to an undersupplied market, we expect supply and demand to become more balanced in the long-run, driving down prices and margins.
Cellulose fiber operating margins are stabilizing in the high-single-digit range, in line with our longer-term outlook for the segment. This represents a huge improvement from the year prior, when the business was still being integrated after its purchase by IP from Weyerhaeuser.
Printing paper margins contracted versus the prior year, with higher costs offsetting price increases. Over the long run, we think paper volumes will continue to fall, which will further compress margins in this segment. Although IP can convert these assets to produce containerboard, we expect the conversion to contribute to lower margins in industrial packaging, as multiple companies employ the same conversion strategy, which will shift the balance between supply and demand.
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.
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