Morningstar | We Expect Margins to Stagnate for International Paper as Price Competition Grows
A decade of consolidation in the corrugated packaging industry has allowed International Paper to raise prices more aggressively, lifting margins. However, we expect increased competitive intensity to diminish profitability in the coming years. Weaker margins in corrugated packaging, which accounts for roughly two thirds of IP's sales, would weigh on consolidated profit growth.Despite prolific Amazon boxes, corrugated packaging isn't a growth business. Although e-commerce is likely to remain a demand tailwind, that growth comes on a modest base. Meanwhile, falling paper consumption (12% of U.S. corrugated box usage) and a flat volume outlook for food and beverage (40%) diminish upside. We expect subdued corrugated packaging demand growth, averaging just under 1% per year, in line with the past five years. The demand outlook for IP's paper segment, roughly 15% of sales, is worse. We expect demand for uncoated free sheet, used in office paper and envelopes, to decline 4-5% annually in developed markets, accompanied by falling prices as high-cost production comes offline first. In emerging markets (about 20% of paper segment revenue), rising incomes are a partial offset to secular paper-to-pixels substitution.With the acquisition of Weyerhaeuser's fluff pulp assets in late 2016, pulp sales will make up roughly 15% of sales. While IP has done an excellent job of lifting margins in this business, we expect margins to flatten over time, merely earning the cost of capital in this commodity business.Falling paper demand threatens the profitability of IP's corrugated packaging business. We expect a portion of idled paper capacity will be converted to linerboard production, attracted by the corrugated industry's healthy economics. IP converted its 350,000-ton Pensacola paper machine into a 500,000-ton lightweight linerboard machine in 2007. Additional supply amid tepid demand growth should pressure prices and diminish margins for containerboard producers.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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