Morningstar | IP Manages Strong 3Q Despite Hurricane Headwinds; Maintaining $49 FVE
International Paper wrapped up another strong quarter, driven by improved price across all three segments. Consolidated sales rose to $5.9 billion, up roughly 2% versus the second quarter, while adjusted operating income rose 21% on strengthening profitability in both the Printing Papers and Cellulose Fibers segments. Hurricane Florence imposed about $36 million in additional costs during the third quarter, with management estimating another $15 million still to come in the fourth quarter. With our long-term forecasts largely unchanged, our fair value estimate remains $49 per share, and our no-moat rating stands. After a brutal month for paper companies, IP's shares have rebounded 7%, and now look only mildly undervalued.A positive surprise during the quarter was the extent of adjusted operating income improvement in the Printing Papers segment. Adjusted operating income doubled to $188 million versus the second quarter, with stronger price/mix benefits than we previously anticipated. There was also a $44 million benefit from lower maintenance in the quarter. However, we remain bearish about the long-term prospects in printing papers. In our view, consumption will continue to fall amid the secular trend of going paperless. Lower demand will lead to a flatter cost curve and lower operating margins for IP.
Cellulose Fiber segment adjusted operating margins also strengthened, at nearly 12% versus 10% in the second quarter. A supportive pricing environment made up the bulk of the gains, which we had already expected this year. Industrial Packaging adjusted operating profit rose to $598 million, up 5% versus the second quarter, as the last of the box price increases went through. As we've previously written, we remain skeptical of the long-term sustainability of excess return on containerboard assets. In our view, these companies still produce commodity products, and excess return will be competed away by new entrants, or the expansion of existing players.
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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