International Paper’s stock price has taken a beating over the past six months, shedding 22.9% of its value and falling to $35.65 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think International Paper Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid IP and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, International Paper’s 3.9% annualized revenue growth over the last five years was sluggish. This was below our standard for the industrials sector.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, International Paper’s margin dropped by 7.4 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle. International Paper’s free cash flow margin for the trailing 12 months was breakeven.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, International Paper’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping their customers, but in the case of International Paper, we’re out. After the recent drawdown, the stock trades at 21.1× forward P/E (or $35.65 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. Let us point you toward a top digital advertising platform riding the creator economy.
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