International Paper Co., the world's largest wood products company, reports earnings for the fourth quarter on Wednesday. The following is a summary of key developments and analyst opinion related to the period.
OVERVIEW: The drop in demand for wood products that resulted from the global recession leveled off during the third quarter, with selling prices stable and input costs during the summer remaining "tame," said Gail S. Glazerman of UBS. But the absence of a recovery means Memphis, Tenn.-based IP still has excess capacity. So last week CEO John Faraci announced plans to cut the manufacturing capacity by 13 percent and the staffing level by nearly 3 percent.
"When you look at the containerboard industry demand is off about 10 percent this year," Faraci said last week. "While recovery is expected to result in modest future growth, we believe the growth will be slow in returning to 2007-2008 levels and that we can meet our expected customer demand with fewer facilities."
Layoffs and capacity cuts made earlier this year plus other cost-cutting measures along with the government's alternative fuel or "black liquor" tax credit — worth an estimated $1.2 billion to IP this year — have aided a faster-than-expected debt reduction. In addition, reduced capital expenditures and a higher utilitization rate are expected to further strengthen IP's finances.
BY THE NUMBERS: Analysts surveyed by Thomson Reuters expect, on average, earnings per share to fall to 24 cents on revenue of $5.89 billion from the year-earlier level of 35 cents per share on revenue of $6.8 billion.
ANALYST TAKE: Wall Street likes IP. Sterne Agee analyst Mark Connelly said IP is the only containerboard company he recommends, noting it has more room to cut containerboard production costs than several of its key rivals.
WHAT'S AHEAD: RBC analyst Paul C. Quinn began covering International Paper with an "Outperform" rating on the stock. The fact that the company generates "significant free cash flow from operations" in a difficult environment suggests good things to come when the environment improves, he said.
"If IP can do all this in difficult markets, investors should ask what the company is capable of once global economies recover."
UBS' Glazerman said inventories are at or near their 10-year average. That raises the likelihood that any increase in demand will trigger fresh customer orders.
STOCK PERFORMANCE: Shares rose 47 percent during the third quarter, and are up 104 percent since the beginning of the year. By contrast, the S&P 500 stock index rose 15 percent in the third quarter.
