International Paper (IP)

Packaging and materials company International Paper (NYSE:IP) fell short of the market’s revenue expectations in Q1 CY2025, but sales rose 27.8% year on year to $5.90 billion. Its non-GAAP profit of $0.23 per share was 38% below analysts’ consensus estimates.

Company Overview

Established in 1898, International Paper (NYSE:IP) produces containerboard, pulp, paper, and materials used in packaging and printing applications.

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.

Competitors include WestRock (NYSE:WRK, Graphic Packaging (NYSE:GPK), and Packaging Corporation of America (NYSE:PKG)

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. International Paper struggled to consistently generate demand over the last five years as its sales dropped at a 2.1% annual rate. This wasn’t a great result and suggests it’s a low quality business.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. International Paper’s annualized revenue declines of 2.5% over the last two years align with its five-year trend, suggesting its demand has consistently shrunk. International Paper isn’t alone in its struggles as the Industrial Packaging industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

This quarter, International Paper generated an excellent 27.8% year-on-year revenue growth rate, but its $5.90 billion of revenue fell short of Wall Street’s high expectations.

Looking ahead, sell-side analysts expect revenue to grow 30.9% over the next 12 months, an improvement versus the last two years. This projection is eye-popping for a company of its scale and suggests its newer products and services will spur better top-line performance.

International Paper’s unit economics are better than the typical industrials business, signaling its products are somewhat differentiated through quality or brand. As you can see below, it averaged a decent 30.2% gross margin over the last five years. That means for every $100 in revenue, roughly $30.18 was left to spend on selling, marketing, R&D, and general administrative overhead.

International Paper’s gross profit margin came in at 27.8% this quarter, marking a 2 percentage point increase from 25.9% in the same quarter last year. International Paper’s full-year margin has also been trending up over the past 12 months, increasing by 1.3 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

International Paper was profitable over the last five years but held back by its large cost base. Its average operating margin of 6.3% was weak for an industrials business.

Looking at the trend in its profitability, International Paper’s operating margin decreased by 5.8 percentage points over the last five years. We’ve noticed many Industrial Packaging companies also saw their margins fall (along with revenue, as mentioned above) because the cycle turned in the wrong direction, but International Paper’s performance was poor no matter how you look at it. It shows that costs were rising and it couldn’t pass them onto its customers.

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 is profitable.

Sadly for International Paper, its EPS declined by 21.1% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

We can take a deeper look into International Paper’s earnings to better understand the drivers of its performance. As we mentioned earlier, International Paper’s operating margin declined by 5.8 percentage points over the last five years. Its share count also grew by 11.5%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

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 42.8% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q1, International Paper reported EPS at $0.23, up from $0.18 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

International Paper has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.4%, subpar for an industrials business.

Taking a step back, we can see that International Paper’s margin dropped by 11.5 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

International Paper burned through $618 million of cash in Q1, equivalent to a negative 10.5% margin. The company’s cash flow turned negative after being positive in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

International Paper historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 8.4%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

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. On average, International Paper’s ROIC decreased by 2.9 percentage points annually over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

International Paper reported $1.16 billion of cash and $10.1 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.10 billion of EBITDA over the last 12 months, we view International Paper’s 4.3× net-debt-to-EBITDA ratio as safe. We also see its $243 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its EPS missed significantly and its revenue fell slightly short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 2.5% to $46.43 immediately after reporting.

Updated: May 17, 2025 at 11:19 PM EDT

Before investing in or passing on International Paper, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

International Paper doesn’t pass our quality test. For starters, its revenue has declined over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its declining EPS over the last five years makes it a less attractive asset to the public markets.

International Paper’s EV-to-EBITDA ratio based on the next 12 months is 7.5x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $52.88 on the company (compared to the current share price of $49.79).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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