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Sell International Paper Stock Because People Need Fewer Boxes, Analyst Says -- Barrons.com Sell International Paper Stock Because People Need Fewer Boxes, Analyst Says -- Barrons.com Dow Jones By Al Root Material stocks are some of the worst-performing stocks in the U.S. market Tuesday. Material components of the S&P 500 are down 0.5%, worse than the 0.2% gain in the overall market. Paper, not chemical, stocks appear to be the problem. Dow shares gained 1.2% after RBC Captial Markets upgraded the commodity chemical maker. But International Paper (ticker: IP) shares are down 6.2% following a downgrade by Bank of America Merrill Lynch analyst George Staphos. Staphos cut International Paper and cardboard competitor Packaging Corporation of America (PKG) to Neutral from Buy. His target price for International Paper is now $50 a share, down from $53, only 6% higher than Monday's closing price. Staphos' price for Packaging Corp. is now $107 a share, dow from $112, only 5% higher than Monday's closing price. Cardboard stocks were strong stock market performers before the downgrades. Packaging Corp. shares rose 20% in 2019 before falling more than 7% on Tuesday. International Paper shares rose nearly 17% this year before the downgrade. The S&P 500 is up 16% year to date. The back story: The cardboard industry is an oligopoly, with a few producers making most of the boxes. According to its filings, International Paper is the leading producer of containerboard globally. Containerboard is what gets turned into cardboard boxes. A limited number of competitors is supposed to be a positive factor for an industry. Fewer companies controlling supply should mean less of a chance that new capacity additions will upset the supply-demand balance. What's new: The problem for the cardboard industry is box demand isn't growing. Staphos writes that box shipment fell a surprising 3% year over year in March. What's more, box inventories fell less than he expected. More inventory means less demand for new box production down the road. "We view [International Paper] as well-managed in its industry," Staphos wrote in a research report on Monday. "Recent containerboard and box data suggests producers are having challenges managing excess inventory and production, and pricing could remain subdued for the foreseeable time." Basic material producers have a tough time outperforming the market when commodity prices are falling. Looking ahead: Why is box demand falling? We could blame Amazon.com and its frustration-free-packaging initiative. That is anecdotal but, no matter the reason, slow demand growth will keep a lid on valuation multiples. International Paper shares trade for 8.6 times estimated 2019 earnings, a 32% discount to the historical average and a 51% discount to the broader market. Staphos prefers aluminum can makers Ball (BLL) and consumer products company Avery Dennison (AVY) for investors wanting exposure to the packaging industry. International Paper reports quarterly earnings on April 25. Analyst expect the company to earn 91 cents a share on $5.7 billion in sales. Investors should also get important detail on the direction of price during the conference call. |
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