International Paper Earnings: Near-Term Demand Headwinds Do Not Change Our Long-Term Outlook

No-moat-rated International Paper IP reported second-quarter results that were largely in line with our expectations. Revenue decreased 13% year over year as both segments experienced double-digit declines amid additional inventory destocking during the quarter. That said, management noted a recent slowdown in destocking and expects much of the trend to be behind the firm, which could provide a tailwind for volume growth in the second half of the year. Consolidated operating margins declined 300 basis points from a year ago to 7.0%, as the pullback in volumes was met with lower prices across IP’s portfolio. As such, we’ve decreased our fair value estimate to $42 from $44 per share due to lower near-term revenue and profitability in our forecast.

International Paper’s industrial packaging segment continued to navigate a challenging operating environment as revenue decreased almost 14% year over year due to declines in both volume and price. Additionally, segment operating margins decreased nearly 500 basis points from a year ago to 7.8% but received some relief from lower inputs costs during the quarter. Customers continued to destock during the quarter as they worked through elevated inventories while consumer preferences shifted from goods to services. We expect volumes to improve sequentially through the end of the year as destocking trends soften, but prices are likely to remain pressured.

The cellulose fibers segment faced similar challenges in the quarter, with revenue decreasing 11% year over year on weak demand for fluff pulp and lower prices. Customers continued to work down their elevated inventories of absorbent hygiene products, which has negatively affected fluff pulp volumes for much of the year. Nevertheless, the segment posted a $30 million operating profit due to lower operating and input costs during the quarter. While fluff pulp destocking will likely persist into the third quarter, improved cost management should provide some margin relief.