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Stock Analyst Update

Cuts at International Paper Should Boost Earnings

Industry leader's plant closings a wise move financially.

What Happened?
International Paper (IP) said Wednesday morning that it would slash production in its pulp, uncoated paper, and containerboard businesses by a total of 1.2 million tons annually--roughly 5% of the company's production in these areas. The company said the restructuring, which will include three mill closures and a fourth that will be significantly scaled back, should yield annual pretax earnings improvements of about $100 million. The firm also reported quarterly earnings of $0.53, a penny above First Call consensus forecasts and a 15% improvement from a year ago.

What It Means for Investors
We believe this restructuring should improve the company's future results. The U.S. paper industry in recent years has been plagued by weak prices spurred by overcapacity. To compensate, many companies such as IP have taken significant downtime. But maintaining expensive facilities that are producing little paper or pulp creates an inherent drag on earnings. Shuttering facilities that have generated slim--or even negative--returns will be painful for the 2,500 affected workers, but a logical move for the company. On the basis of IP's estimated savings, the restructuring should yield at least a 4% improvement in earnings from current levels and reduce future capital expenditures.

In addition, we believe that further restructuring is likely for IP. The company could yet this year or else sometime in 2001 start shedding at least $3 billion worth of noncore businesses that do everything from explore for petroleum to produce cosmetic fragrances. IP continues to trade at a discount to peers despite having one of the most realistic plans to improve profits in a mature industry. Therefore, we continue to believe that the company is one of the better values in a sector that has struggled with depressed stock prices for months.

Craig Woker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.