International Paper’s 22.3% return over the past six months has outpaced the S&P 500 by 17%, and its stock price has climbed to $55.66 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy International Paper, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Despite the momentum, we don't have much confidence in International Paper. Here are three reasons why there are better opportunities than IP and a stock we'd rather own.
Why Do We Think International Paper Will Underperform?
Established in 1898, International Paper (NYSE:IP) produces containerboard, pulp, paper, and materials used in packaging and printing applications.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. International Paper’s demand was weak over the last five years as its sales fell at a 4% annual rate. This fell short of our benchmarks and signals it’s a low quality business. 
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 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.
3. Free Cash Flow Margin Dropping
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.
As you can see below, International Paper’s margin dropped by 6.1 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. International Paper’s free cash flow margin for the trailing 12 months was 4.3%.
Final Judgment
International Paper falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 22.8× forward price-to-earnings (or $55.66 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. Let us point you toward Costco, one of Charlie Munger’s all-time favorite businesses.
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