International Paper's Spin-Off of xpedx Gains the Firm a Narrow Moat
We're confident that the firm can generate consistent economic profits over the next decade thanks to the low-cost production advantage in its legacy mills.
Since 2005, International Paper Co. (IP) has transformed from a business with 12 operating units to one with just three operating units today (excluding the distribution business that's scheduled to be spun off in mid-2014). Over the past eight years, it has shed more than $11 billion worth of timberland and noncore businesses and strengthened its position in industrial packaging by acquiring Weyerhaeuser's (WY) packaging division in early 2008 and Temple-Inland in 2012. These acquisitions have resulted in IP having an approximate one-third share of the North American containerboard industry, compared with 19% for its closest competitor, Rock-Tenn (RKT).
We recently increased our economic moat rating for International Paper to narrow after considering the impact of the forthcoming tax-free spin-off of the struggling xpedx distribution business. In 2013, xpedx accounted for about 20% of group revenue, and it has been a drag on IP's ability to generate economic profits over the past decade. Though the xpedx division is a relatively small piece of IP's operations, the spin-off provides us with additional confidence that the firm can generate consistent economic profits over the next decade as a result of a low-cost production advantage in its legacy mills, which serve the legacy industrial and consumer packaging and printing papers segments.
Todd Wenning does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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