International Paper Earnings: Pricing Pressure Offsets Cost Savings Initiatives; Shares Attractive

No-moat-rated International Paper IP reported mixed third-quarter results as lower pricing across its business offset relatively stable volumes in the quarter. Net sales decreased 14.5% as both segments reported double-digit declines amid considerable pricing pressure. Destocking continues to be the story for International Paper as inventory management initiatives directly affect demand for packaging. That said, management noted sequential improvements in destocking trends, which could provide some relief going into 2024. As such, we’ve decreased our fair value estimate to $41 from $42 per share due to lower near-term revenue in our forecast.

International Paper’s packaging segment reported lackluster results in the third quarter, with net sales falling 13.5% year over year. The segment’s operating margin expanded 20 basis points to 8.6% even with the decrease in volume and lower selling prices, largely due to cost management at its mills. While this is encouraging, the packaging business faces significant challenges that have proven stickier than anticipated. Inventory destocking along the supply chain has moderated but still affects demand for packaging while a shift in consumer spending from goods to services exacerbates demand pressures. We expect volumes to remain pressured through the end of the year, but moderating destocking should provide some relief in the first half of 2024.

The cellulose fibers business continued to navigate a challenging operating environment as lower index prices weighed heavily on the segment. Revenue tumbled 18% year over year due to lower selling prices that were somewhat offset by higher volumes. The segment reported a $27 million operating profit in the quarter and is on pace to report a full-year operating profit in consecutive years following multiple years of losses. Destocking has also been an issue for the fibers business, but management noted sequential improvements which should continue moderating through the end of the year.