Over the last six months, International Paper’s shares have sunk to $33.39, producing a disappointing 14.8% loss - a stark contrast to the S&P 500’s 10.3% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in International Paper, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think International Paper Will Underperform?
Even though the stock has become cheaper, we’re cautious about International Paper. Here are three reasons why there are better opportunities than IP, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, International Paper grew its sales at a sluggish 3.9% compounded annual growth rate. This was below our standard for the industrials sector.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for International Paper, its EPS declined by 15.5% annually over the last five years while its revenue grew by 3.9%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
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. Over the last few years, International Paper’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
International Paper falls short of our quality standards. Following the recent decline, the stock trades at 18.9× forward P/E (or $33.39 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
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