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Mayank Bindal Rashedur Rahman William Weintraub Rochester Institute of Technology Saunders College of Business November 11, 2011.

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Presentation on theme: "Mayank Bindal Rashedur Rahman William Weintraub Rochester Institute of Technology Saunders College of Business November 11, 2011."— Presentation transcript:

1 Mayank Bindal Rashedur Rahman William Weintraub Rochester Institute of Technology Saunders College of Business November 11, 2011

2 Disclaimer Most of the data, tables and charts used in this presentation have been taken from various published International Paper documents and outside sources, as referenced on the slides. The sole purpose of this presentation is to synthesize the publicly available information about International Paper and make a recommendation on its long-term investment outlook. 2

3 Agenda A.Company Overview B.Industry Analysis C.Financial Analysis D.Valuation E.Recommendation 3

4 A global paper and packaging company, with corporate and operational headquarters located in Memphis, TN Manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa Business segments: Industrial Packaging, Printing Papers, Consumer Packaging, Distribution and Forest Products Top manufacturer of containerboard production; 70% used in industrial corrugated boxes Owns/manages 250,000 acres of forestland in Brazil; harvesting rights in Russia A.1 The Company - Operations Source: International Paper Company Website, data as of 12/31/10 4 U.S.Global 20 pulp, paper and packaging mills8 pulp, paper and packaging mills 144 converting and packaging plants67 converting and packaging plants 19 recycling plants2 recycling plants 3 bag facilitiesNone 224 distribution branches38 distribution branches

5 A.2 The Company – Financial Overview Stock Symbol: IP Sector: Consumer Goods Industry: Paper & Paper Products International Paper’s common stock is listed on the New York, Amsterdam and Swiss stock exchanges Stock Price close of the day 11/09/11: $28.07 One Year Est. Price Target: $36.31 Common Stock diluted EPS $1.19 ($0.92 excluding special items) in 3Q11 2011 nine months ended 9/30/11 net sales $20 billion ($1.1 billion increase over 9/30/10) Source: 1Yr Est. Target Factset 11/04/11, EPS: IP 10Q 3Q11, Executive Summary 5

6 A. 3 Segments & Global Portfolio Operating Earnings by Segments Operating Earnings by Region Source: IP 3Q11 Earnings Call 6

7 A.4 Major Developments On November 1, 2011, Carol Roberts was named Senior Vice President and CFO On October 14, 2011, International Paper completed the acquisition of a 75% interest in Andhra Pradesh Paper Mills Limited (APPM). The Company purchased 53.5% of APPM's outstanding shares from the controlling shareholders for approximately $226 million in cash in addition to other financial arrangements. On September 6, 2011, International Paper entered into a definitive merger agreement with Temple-Inland Inc. to acquire all of the outstanding common stock of Temple-Inland for $32.00 per share in cash, plus the assumption of approximately $600 million in Temple-Inland's debt. On June 30, 2010, International Paper completed the acquisition of SCA Packaging Asia (SCA) for a purchase price of $202 million. Source: IP 10Q 3Q11 7

8 A.5 Major Developments (Continued) Source: IP 10Q 3Q11 8 On June 20, 2010, International Paper completed the acquisition of SCA Packaging Asia (SCA) for a preliminary purchase price of $205 million In March 2008, International Paper agreed to acquired the corrugated packaging business of Weyerhaeuser for $6 billion in cash Since 2005, IP has completed a major restructuring of its operations: – Under this plan, company has concentrated on uncoated papers and industrial and consumer packaging businesses (including its distribution unit) and has divested its other operations

9 A.6 Deal Activity 2010 - 2011 Stock Price Months Shorewood Packaging Temple Inland Tikhvin Forestry Andhra Pradesh Paper Source: Factset 9

10 A.7 Corporate Governance Source: Source: International Paper Company Website, Proxy Report 10

11 A.8 Sustainability and CSR FocusPractices and Results 1.Promoting responsible forest management globally 2.Helping customers to meet sustainability goals 3.Partnering with stakeholders to advance mutual sustainability objectives 4.Leveraging the inherent sustainability of paper with innovative new product designs 5.Eliminating life-changing injuries and fatalities in the workplace 6.Strengthening support and participation in the communities where IP operates Recycling: Annually recover some 6 million tons of fiber- about 12% of total U.S. fiber collection Partnership: Cooperative agreement with China (SFA) and Brazil (Sao Paulo State Government) to support the development of sustainable forestry Responsible manufacturing: Invested $45 million to improve energy efficiency, and reduced energy consumption by 11% between 2005 and 2009 Workforce: Improved Total Incidence Rate (TIR), diversity (32% of the total workforce are women or minorities) Communities: in 2010, amount exceeded $10 million and was distributed to non-profit organizations. Examples includes Coins 4 Kids, National Civil Rights Museum Freedom Awards and A Walk in the Park, etc. Source: Source: International Paper Company Website, Proxy Report 11

12 A.9 Risks IndustryMarket and Economic Factors Legal Proceedings & ComplianceOperational Risks -------------------------------- Analyst Findings -------------------------------- S&P (10/15/2011) The Street Ratings: (10/2/2011) Economic Investor (10/11/2011) Qualitative : Medium Quantitative: B Poor debt managementIP’s Index is 128 (Better then the competitors but below the average of Dow Jones-54, S&P,-60 and other leading such as Walmart-70, J&J-75) 12

13 B.1 Industry Paper products industry includes about 3,500 companies with combined total revenue of $160 billion - fragmented Major companies include Georgia-Pacific, International Paper, Kimberly-Clark, MeadWestvaco and Neenah Paper Highly cyclical and capital-intensive. Demand depends upon: - industrial non-durable goods production - consumer spending - commercial printing - advertising activity Volatile product prices, IP given its size still not able to influence timing and extent of price changes Technology seems to have an impact on demand for uncoated free sheet in long run Source: 10K, S&P Report 13

14 B.2 Peer Group Source: Street Ratings 10/2/11 14 Company Name Recent Price ($) Market Cap ($M) Price/ Earnings Net Sales TTM ($M) Net Income TTM ($M) INTL PAPER CO24.15 10,5568.53 26,286.00 1,279.00 SCHWEITZER-MAUDUIT INTL INC58.32 93914.44 751.70 67.90 CLEARWATER PAPER CORP34.86 80311.43 1,658.94 72.30 SCA-SVENSKA CELLULOSA AB12.72 7,7389.64 17,398.68 926.86 KAPSTONE PAPER & PAKIAGING14.37 6667.98 829.64 84.85 GLATFELTER13.58 6218.43 1,560.21 74.63 MEADWESTVACO CORP25.76 4,39713.14 5,924.00 186.00 FIBRIA CELULOSE SA7.99 3,7397.99 3,763.72 670.06 DOMTAR CORP71.11 2,8024.32 5,672.00 703.00 SAPPI LTD3.02 1,622NM 7,273.00 (21.00) BUCKEYE TECHNOLOGIES INC25.03 1,0028.18 905.34 124.27

15 B.3 Industry Paper and Paper Products Production – 5 Years Source: Factset Year % Increase 15

16 B.4 Industry Paper and Paper Products Industrial Capacity – 5 Years Source: Factset Year % Increase 16

17 B.5 Industry Paper and Paper Products Capacity Utilization – 5 Years Source: Factset Year % Capacity 17

18 C.1 Credit Analysis IP expects to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2011 through current cash balances and cash from operations Net Worth: – Maintenance Minimum Net Worth: $9 Billion – IP Net Worth: 12.4 Billion Debt – Capitalization Ratio: – Requirement: Total Debt – Capitalization ratio: < 60% – IP Total Debt – Capitalization ratio: 41.2% Source: Morningstar 18

19 C.2 Earnings Analysis Source: 10 K 19 IPIndustry Current P/E17.85.8 Net Profit Margin7.8%9.0% ROE19.1%16.8% Beta2.621.52 P/B Value1.611.78

20 C.3 Operating EPS Year EPS Source: 3Q11 Earnings Call 20

21 C.4 Profitability Analysis International Paper is superior in profitability in 2010 Financial crisis (2008-2009) greatly impacted profitability and liquidity Source: 10 K 21

22 C.5 ROI Year ROI Source: 3Q11 Earnings Call 22

23 C.6 Financial Statement Analysis INCOME STATEMENT (12/31) Sales: $21.9B to $25.2B from 2007 to 2010, respectively, a 15.1% increase over the 5-year period Net Income: $1.2B to $.7B from 2007 to 2010, respectively, a 41.7% decline over the 5-year period BALANCE SHEET (9/30/11) Cash & CE: $2.7B Long-Term Debt: $7.8B DIVIDEND PAYOUT 2007: $1.00 2008: $1.00 2009: $.10 2010: $.50 2011 (Annualized): $1.05 Source: 10 K 23

24 C.7 Financial Statement Analysis Source: 10 K 24

25 D.1 Valuation Source: Factset 25 IP EPS/Earnings Growth – 5 Years Year EPS EPS Growth %

26 D.2 Valuation Broker Outlook– 1 year Source: Factset 26

27 E. Recommendation - Buy Undervalued: Fundamental price using discounted free cash flow approach translates into 20% upside potential $34.43 27

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