Packaging and materials company International Paper (NYSE:IP) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 1.6% year on year to $4.69 billion. Its non-GAAP profit of $0.44 per share was 74.8% above analysts’ consensus estimates.
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International Paper (IP) Q3 CY2024 Highlights:
- Revenue: $4.69 billion vs analyst estimates of $4.70 billion (in line)
- Adjusted EPS: $0.44 vs analyst estimates of $0.25 ($0.19 beat)
- Gross Margin (GAAP): 28.7%, up from 27.5% in the same quarter last year
- Operating Margin: 2.8%, down from 6.6% in the same quarter last year
- EBITDA Margin: 8.5%, down from 12.8% in the same quarter last year
- Free Cash Flow Margin: 11.1%, up from 5.2% in the same quarter last year
- Market Capitalization: $17.03 billion
"Our third quarter earnings are above our outlook," said Chairman and CEO Andy Silvernail.
Company Overview
Established in 1898, International Paper (NYSE:IP) produces containerboard, pulp, paper, and materials used in packaging and printing applications.
Industrial Packaging
Industrial packaging companies have built competitive advantages from economies of scale that lead to advantaged purchasing and capital investments that are difficult and expensive to replicate. Recently, eco-friendly packaging and conservation are driving customers preferences and innovation. For example, plastic is not as desirable a material as it once was. Despite being integral to consumer goods ranging from beer to toothpaste to laundry detergent, these companies are still at the whim of the macro, especially consumer health and consumer willingness to spend.
Sales Growth
Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, International Paper’s revenue declined by 4% per year. This shows demand was weak, a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. International Paper’s recent history shows its demand has stayed suppressed as its revenue has declined by 6% annually over the last two years. International Paper isn’t alone in its struggles as the Industrial Packaging industry experienced a cyclical downturn, with many similar businesses seeing lower sales at this time. 
We can dig further into the company’s revenue dynamics by analyzing its most important segments, Industrial Packaging and Cellulose Fibers, which are 83.8% and 15.2% of revenue. Over the last two years, International Paper’s Industrial Packaging revenue (containers, displays, bins) averaged 5.8% year-on-year declines while its Cellulose Fibers revenue (materials) averaged 4.1% declines.
This quarter, International Paper grew its revenue by 1.6% year on year, and its $4.69 billion of revenue was in line with Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 5.9% over the next 12 months, an improvement versus the last two years. Although this projection shows the market thinks its newer products and services will spur better performance, it is still below average for the sector.
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Operating Margin
International Paper was profitable over the last five years but held back by its large cost base. Its average operating margin of 6.5% was weak for an industrials business.
Analyzing the trend in its profitability, International Paper’s annual operating margin decreased by 7.2 percentage points over the last five years. The company’s performance was poor no matter how you look at it. It shows operating expenses were rising and it couldn’t pass those costs onto its customers.
In Q3, International Paper generated an operating profit margin of 2.8%, down 3.8 percentage points year on year. Conversely, its revenue and gross margin actually rose, so we can assume it was recently less efficient because its operating expenses like marketing, R&D, and administrative overhead grew faster than its revenue.
Earnings Per Share
We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.
Sadly for International Paper, its EPS declined by more than its revenue over the last five years, dropping 20.7% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Diving into the nuances of International Paper’s earnings can give us a better understanding of its performance. As we mentioned earlier, International Paper’s operating margin declined by 7.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.
For International Paper, its two-year annual EPS declines of 35.5% show it’s continued to underperform. These results were bad no matter how you slice the data.In Q3, International Paper reported EPS at $0.44, down from $0.64 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects International Paper’s full-year EPS of $1.57 to grow by 55.2%.
Key Takeaways from International Paper’s Q3 Results
Despite in line revenue, EPS beat convincingly. The stock traded up 4% to $51 immediately following the results.
Big picture, is International Paper a buy here and now? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.