International Paper Could Unbox a Pleasant Surprise for Investors – Sustained gains in e-commerce—and a reduced inventory glut—should help the manufacturer
By guest author Justin Lahar from the Wall Street Journal.
This column is part of the seventh annual Heard on the Street stock-picking contest.
When Americans’ spending on stuff surged shortly after the pandemic hit, International Paper’s IP 1.25%increase; green up pointing triangle sales and stock boomed. It made sense: A lot of the stuff came in boxes the company had made, especially stuff bought online, as anyone could see from all the boxes piling up on front porches.
Then came the hangover. As people reengaged in activities such as dining out and taking vacations, spending on boxed goods stopped growing so swiftly. Worse, retailers and other consumer-facing businesses weren’t really prepared for the slowdown, and ended up taking on more inventory than they needed—including the corrugated boxes and other packaging materials that drive International Paper’s sales.
When Americans’ spending on stuff surged shortly after the pandemic hit,
International Paper’s IP 1.25%increase; green up pointing triangle sales and stock boomed. It made sense: A lot of the stuff came in boxes the company had made, especially stuff bought online, as anyone could see from all the boxes piling up on front porches.
Then came the hangover. As people reengaged in activities such as dining out and taking vacations, spending on boxed goods stopped growing so swiftly. Worse, retailers and other consumer-facing businesses weren’t really prepared for the slowdown, and ended up taking on more inventory than they needed—including the corrugated boxes and other packaging materials that drive International Paper’s sales.
The company’s stock price is now 43% below its peak in June 2021 and 16% below its average trading level in 2019.
Shares of other pandemic sales-boom beneficiaries have sold off, too, but are still a lot higher than they used to be.
United Parcel Service’s stock, for example, is trading more than 50 % higher than its 2019 average.
Yet through the volatility, underlying demand looks much better than before the pandemic. Commerce Department figures show that e-commerce sales accounted for a seasonally adjusted 15.4 % of retail sales in the second quarter of this year, compared with 11.2 % in the fourth quarter of 2019. This suggests that a behavioural shift among consumers has, in fact, taken hold.
Meanwhile, many businesses appear to have worked off excess inventories, or are close to it. More manufacturers polled by the Institute for Supply Management have lately been saying their customers’ inventories look too low rather than too high, while economists reckon that a rebound in inventories will add as much as a percentage point, or more, to annualized growth in gross domestic product in the third quarter.
For its part, on its earnings call in late July, International Paper said that North American corrugated packaging customers it surveyed reported inventories were at or near their target levels entering the third quarter, whereas at the start of the second quarter inventories were mostly too high.
Inventory rebuilding, when coupled with rising demand, can induce powerful “bullwhip” effects that can supercharge sales as customers try to restock even as more stock heads out the door.
That might not be in the cards now. Though worries about the possibility of the economy slipping into a recession might have subsided, they have hardly gone away. Still, even if its customers merely stop drawing down inventories, International Paper could quickly look more enticing to investors.