The options market is often considered to be an indicator of “smart money,” as knowledgeable individuals or institutions usually trade options. An underlying asset’s bullish or bearish signals can be identified by monitoring options trades.
On March 31, 2023, an abnormally large block worth $147.78 thousand of call contracts in International Paper Company (IP) was bought with a strike price of $37 per share. The contract expires on April 21, 2023.
In this piece, I have discussed whether investors should invest in IP considering this unusually large call option contract.
IP’s EPS for the fourth quarter beat analyst estimates by 25.5%, while its revenue missed the consensus estimate by 1.5%. IP’s Chairman and CEO Mark Sutton said, “In 2022, International Paper grew revenue and earnings in a dynamic and challenging macro environment and returned $1.9 billion to our shareholders.”
“Our commercial and mill operational performance was solid, while significant inflation and lower demand impacted margins. We also delivered $250 million of earnings benefits from our Building a Better IP initiatives, exceeding our target for the year and building solid momentum going forward,” he added.
Earlier this year, the company announced that it had agreed to sell its 50% interest in llim SA to its joint venture partners for $484 million equity value. The ILIM transaction was concluded for a total enterprise value of approximately $3.5 billion based on a 2022 EBITDA multiple of 3.1x. IP recorded a negative-one-off charge of $533 million in the fourth quarter.
On the prospects of 2023, Sutton said, “As we enter 2023, International Paper is well-positioned to navigate various economic environments from a position of strength, given our strategic customer relationships, our highly talented teams, our track record of solid cash generation, and our strong balance sheet. We also remain focused on creating value for all our stakeholders as we continue Building a Better IP.”
IP paid a quarterly dividend of $0.4625 per share on March 15, 2023. Its annual dividend of $1.85 yields 5.2% on the current share price. The company’s dividend payouts have increased at a 0.8% CAGR over the past five years. Its four-year average yield is 4.59%.
The stock has gained 7.9% in price over the past six months and 2.4% year-to-date to close the last trading session at $35.47. Wall Street analysts expect the stock to hit $38.45 in the near term, indicating a potential upside of 8.4%.
Here’s what could influence IP’s performance in the upcoming months:
Robust Financials
IP’s net sales for the fourth quarter that ended December 31, 2022, increased 0.9% year-over-year to $5.13 billion. The company’s adjusted operating earnings increased 31.5% year-over-year to $309 million. Its adjusted operating EPS came in at $0.87, representing a 42.6% increase over the prior-year quarter.
For the fiscal year ended December 31, 2022, IP’s net sales rose 9.3% over the prior-year period to $21.16 billion. Its adjusted operating earnings increased 23.7% year-over-year to $1.17 billion. The company’s cash provided by operations increased 7.1% year-over-year to $2.17 billion.
In addition, its adjusted operating earnings per share came in at $3.18, representing an increase of 32% year-over-year.
Mixed Analyst Estimates
IP’s EPS and revenue for fiscal 2023 are expected to decline 12.2% and 4.2% year-over-year to $2.79 and $20.26 billion, respectively. On the other hand, its EPS and revenue for fiscal 2024 are expected to increase 4.5% and 0.2% year-over-year to $2.92 and $20.31 billion, respectively.
Solid Historical Growth
IP’s revenue grew at a CAGR of 4.9% over the past three years. Its EPS grew at a CAGR of 10.1% over the past three years. In addition, its net income grew at a CAGR of 7.1% in the same time frame.
Discounted Valuation
In terms of forward non-GAAP P/E, IP's 12.83x is 6.7% lower than the 13.76x industry average. Its forward P/S of 0.61x is 44.8% lower than the 1.11x industry average. Also, the stock's 1.42x trailing-12-month Price/Book is 24.2% lower than the 1.87x industry average.
Mixed Profitability
In terms of the trailing-12-month levered FCF margin, IP’s 5.02% is 8.4% higher than the 4.63% industry average. Likewise, its 19.81% trailing-12-month Return on Common Equity is 69.5% higher than the industry average of 11.69%. Furthermore, the stock’s 0.86x trailing-12-month asset turnover ratio is 13.1% higher than the industry average of 0.76x.
On the other hand, IP’s 9.20% trailing-12-month EBIT margin is 27% lower than the 12.60% industry average. Its 28.44% trailing-12-month gross profit margin is 1.4% lower than the 28.85% industry average.
POWR Ratings Show Promise
IP has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. IP has a B grade for Value, consistent with its discounted valuation.
IP is ranked #4 out of 11 stocks in the A-rated Industrial - Paper industry. Click here to access IP’s ratings for Growth, Stability, and Sentiment.
Bottom Line
IP’s long-term prospects look bright as the world moves away from plastic to paper. Strict regulations on controlling plastic pollution and government initiatives to reduce plastic use are expected to drive the paper industry’s growth. The demand for sustainable packaging materials is growing thanks to the growth of e-commerce and online shopping.
Investors’ interest in IP’s prospects is evident from the large options contract. Given its robust financials, solid historical growth, and discounted valuation, it could be wise to buy the stock now.
How Does International Paper Company (IP) Stack Up Against its Peers?
IP has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Industrial - Paper industry with a B (Buy) rating: Klabin S.A. (KLBAY), Sylvamo Corporation (SLVM), and Sappi Limited (SPPJY).
What To Do Next?
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IP shares were trading at $35.61 per share on Thursday morning, up $0.14 (+0.39%). Year-to-date, IP has gained 4.06%, versus a 6.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
Abnormal $147K Option Trade in IP Has Investors More Than Interested - Should You Buy Into It? StockNews.com
