International Paper

International Paper reported second-quarter net sales of $6.0 billion, down 2% year over year. This quarter saw adjusted operating earnings per share of $0.04, down from $0.18 in the prior-year period, driven by lower sales volumes across both the North American and EMEA packaging segments. 

Why it matters: Management cited a challenging macroeconomic environment due to higher inflation, lower sales volumes, and weak consumer sentiment. Throughout our coverage of the packaging industry, we see similar patterns of higher fiber, freight, and energy costs negatively impacting the industry. The North American segment reported an operating profit of $204 million for an operating margin of 5.5%, down from 7.2% in the same quarter last year. Higher oil prices, maintenance outage costs, and higher fiber costs contributed to lower North American profitability. The EMEA segment also saw a soft market environment driven by similar patterns. EMEA generated $2.29 billion in sales, declining 0.2% year over year. Management is still aggressively cutting costs in EMEA to strengthen profitability, announcing $210 million in savings this quarter.

The bottom line: We maintain our fair value estimate of $39 per share and see shares as fairly valued at current levels. We think no-moat International Paper is likely to struggle in a tougher macro environment, though we expect some improvement in the second half of 2026. We anticipate price increases to gradually offset higher freight, fiber, and energy costs. As a result, we do think the second half of 2026 is likely to show recovering consolidated operating margins. EMEA posted a segment operating loss of $80 million in the second quarter. Management anticipates a significant earnings step-up for EMEA thanks to efficiency and commercial improvements, but we still think maintained EMEA profitability won't be achievable until the second half of 2027.

Following second-quarter results, we've maintained our $39 per share fair value estimate for International Paper.

We anticipate moderate growth and profitability for International Paper over our 10-year forecast horizon, with consolidated sales projected to grow at a roughly 3% compound annual rate. Organically, we forecast revenue growth at a low-single-digit compound annual rate. We forecast segment operating margins averaging about 10% (compared with the 8.2% 10-year average). While material inflation and supply chain disruptions weighed on results in recent years, we expect raw material availability and supply chain congestion to improve over our forecast period.

The North America packaging solutions segment mainly consists of International Paper's legacy operations and has performed well in recent years as the firm has transformed into a containerboard company, and we expect modest revenue growth over the next decade. E-commerce growth has boosted demand for packaging, most notably during the covid pandemic, but the conversion of paper assets to containerboard has increased industry supply. This dynamic has limited containerboard price growth, causing operating margins to suffer while raw material costs and logistics expenses have outpaced selling price increases. Higher costs and marginal price growth have hindered IP’s ability to outearn its cost of capital in recent years. Over our 10-year forecast, we expect revenue in the North America packaging solutions segment to grow at a low-single-digit compound annual rate with margins averaging 10% as price increases are realized and supply chain disruptions abate.

We do not think International Paper benefits from an economic moat, despite being one of the largest containerboard manufacturers in North America. A majority of International Paper’s business (83% of 2024 revenue) involves manufacturing containerboard, with a majority being converted into corrugated packaging. Over the last two decades, consolidation has shifted a once-fragmented industry into four major players and a handful of smaller companies due to the high capital costs required to efficiently produce containerboard. In North America, the firm produces approximately 30% of supply. While there are some traces of efficient scale and cost advantage moat sources, we do not think they are substantial enough to award International Paper an economic moat.

International Paper is the largest producer of containerboard in North America. The containerboard industry has gone through a period of consolidation, with four players now controlling roughly 70% of supply. Many incumbents have deep roots in traditional paper but have since pivoted to containerboard as paper demand declined and corrugated packaging rose. Machines used to make paper can be converted to produce containerboard, making it an attractive opportunity for legacy paper producers. Additionally, e-commerce growth has increased regional and global shipping, with many opting to ship with corrugated packaging for its low cost and durability. This dynamic provided a strong incentive for paper companies to convert their aging paper mills to containerboard mills. During the period of consolidation, corrugated packaging companies enjoyed widening margins as prices were increased aggressively. Following this, incumbents and new entrants were quick to increase supply, mainly by converting aging paper mills to containerboard, putting pressure on containerboard prices. While e-commerce provided a tailwind for growth, declining paper consumption and a flat volume outlook for food and beverage (two significant containerboard end markets) diminished upside. Today, the corrugated packing industry shows elements of a rational oligopoly but continues to face pressure from converted paper mills and threats of substitutes from plastic packaging.

We continue to see little contribution from the efficient scale phenomenon toward International Paper's economic moat. The consolidated nature of the North American containerboard market, where four companies account for about 70% of supply, combined with the commoditized nature of containerboard makes for an industry that could enjoy an efficient scale moat source. That said, the conversion of paper assets has increased capacity and limited containerboard price growth. Lower price growth has constrained margins and hindered the company's ability to consistently outearn its cost of capital. While high capital costs usually keep new entrants from entering a market with efficient scale, smaller paper producers can convert their paper assets to containerboard production.

As the largest containerboard producer in North America, International Paper could benefit from a cost advantage moat source, but we see little evidence that would suggest the firm enjoys this competitive advantage. International Paper operates 23 pulp and packaging mills that are mainly located in the Southeastern US. Once the raw materials are processed at its mills, they are transported to one of its 162 converting and packaging plants. Its plants are dispersed throughout North America to minimize the distance between the plants and customers due to the low value/weight ratio of corrugated board. International Paper’s competitors have comparable mill and plant footprints as they source raw materials in similar areas and require a dense plant network to service customers efficiently. While International Paper is the largest producer of containerboard and could benefit from scale, its production is spread across a handful of mills and numerous plants that each have their own fixed cost structures, preventing it from capitalizing on any operating leverage advantage.

For commodity producers, their position on the cost curve is significant. Operating as a low-cost producer can lead to years of strong economic profits and provide a durable competitive advantage. That said, the low value/weight ratio of containerboard forces producers to operate with a regional and even local presence, with each location having its own cost curve and rendering the industrywide cost curve largely irrelevant. International Paper’s industry-leading size does little to lower its operating and input costs, forcing the firm to compete on price. Without a cost advantage or presence of the efficient scale phenomenon, we do not think that International Paper, being a commodity producer, possesses an economic moat.

After a decade of adjusting its business model to improve profitability, International Paper will enjoy solid returns as it now operates primarily as a containerboard company.

International Paper, Smurfit Westrock and Packaging Corp. of America will remain disciplined in taking economic downtime when needed in order to safeguard prices.

International Paper's exposure to emerging markets will provide excellent opportunities for growth in the coming years.

Despite a period of attractive margin expansion in containerboard production, the best days are behind International Paper as new capacity weighs on linerboard prices.

With the spinoff of its paper business and sale of its fiber business, International Paper is mainly a containerboard business and will see a decrease in revenue and profitability when e-commerce demand normalizes.

Exposure to highly competitive emerging markets could prove risky for IP if profitability fails to meet expectations.