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Stock Analyst Update

International Paper's Warning Isn't as Bad as It Seems

Of reasons behind shortfall, we believe only one is cause for concern.

What Happened?
International Paper (IP) said Wednesday morning that it would fall well short of Zacks consensus earnings estimates in the fourth quarter, suggesting that earnings could be as little as $0.30 per share compared with a $0.51 forecast. The company blamed escalating natural gas costs, a sudden drop in prices in its coated freesheet business, and a slowdown in its building materials unit.

What It Means for Investors
This is bad news, but not as bad as the severity of the shortfall might suggest. After all, the market had already factored the jump in natural gas prices into the stock price, and the firm should be able to minimize future problems by switching to now-cheaper oil for fuel. In addition, the building materials slowdown had been expected. The only new concern is the sudden price drop of coated freesheet (glossy professional paper), which could pressure profits into the first half of next year. However, International Paper is well versed at dealing with similar drops through capacity reductions and cost-cutting. After all, weakness in the unit that makes uncoated freesheet (papers used in copiers and faxes) had been behind much of the company's woes earlier this year before International Paper drastically scaled back production--along with the rest of the industry--to improve earnings.

This new crisis seems to have escalated International Paper's resolve to improve profits and reduce debt. The company said it now plans to sell $5 billion of noncore assets, up from an earlier target of $3 billion, by the end of 2001. Further, International Paper said it is slicing its capital-spending budget next year by 20% from 2000 levels and accelerating its drive to gain synergies from its recent Champion acquisition. So while International Paper seems to have been caught off-guard this quarter, we suspect the company is positioning itself to avoid such a hit again.

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