3 Reasons To Own International Paper
by Will Ashworth,
CNBC’s Jim Cramer recommended International Paper (NYSE:IP) on August 9, suggesting the company’s exposure to emerging markets, along with a 4.1% dividend yield, make it an enticing buy. International Paper cut its dividend by two-thirds in 2009, but the traditional $1 annual dividend appears to be back and then some. While Cramer’s given two excellent reasons to own International Paper, here are three of my own.
Acquisition
International Paper extended its $3.4 billion offer for Temple-Inland (NYSE:TIN) another 30 days August 9 in order to allow Temple-Inland shareholders an opportunity to lobby management to consider the proposed deal, which would combine the largest producer of corrugated packaging with the third largest, giving the merged businesses a 40% market share. You would think their management would be happy to accept a 46% premium to the June 6 stock price, but I guess they like their jobs more than creating shareholder value. It’s no wonder some of their shareholders are filing suit. If Temple-Inland is not willing to accept what appears to be a reasonable offer, at least be willing to have a discussion. A deal still might not materialize but at least shareholders would know you considered it. Ultimately, this deal should take place. Whether it does is another matter altogether. (For related reading, see Biggest Merger And Acquisition Disasters.)
Earnings
Second-quarter results were excellent. Sales grew 8.6% to $6.6 billion and earnings per share, including special items, were up 90% to 80 cents. Its EPS beat analyst estimates by 14 cents or 21%. All four segments achieved an operating profit in the quarter. CEO John Faraci said this about the quarter, “In what remains a slow and extended economic recovery, International Paper continues to demonstrate solid performance and strong free cash flow.” In the first six months of the year, it generated $752 million in free cash flow allowing it to reduce its net debt by $500 million to $6.1 billion. Chief financial officer Tim Nicholls believes the third quarter, despite all the economic instability, will be even better. It is growing in every part of the world except North America, which is flat so far in 2011, and the company is ready to meet the increased demand. With a P/E of less than nine and lower than it has ever been, the future looks bright for both the company and its stock. (Companies can manipulate their numbers, so you need to learn how to determine the accuracy of EPS. For more, see How To Evaluate The Quality Of EPS.)
David Tepper
In case you’re still sitting on the fence, let me remind you that billionaire hedge fundoperator David Tepper owns its stock. In fact, it’s his seventh-largest holding out of his 72 stocks and $4.2 billion. If you need a little more convincing, let me also remind you that his Appaloosa Investment LP I averaged 30.5% annually over the last 10 years. That’s a tremendous accomplishment. Interestingly, he also owns Tesoro (NYSE:TSO), Goodyear(NYSE:GT) and Teradyne (NYSE:TER), all recent ‘buy’ recommendations of mine. He also has 1.2 million shares of Temple-Inland. I wonder what he thinks of the offer. According to sources, 7.8% of Temple-Inland shareholders have tendered their stock. Tepper picked up his first 570,000 shares between July 2010 and September 2010 at below $20. I doubt he’s waiting around for a better offer.
Categories: Finding Oxstones, Hedge Fund, Investment Wisdom, North America, Stocks