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<FOOLISH FOUR PORTFOLIO>
IP Struggles
International Paper tries to make the cut
by Chris Rugaber
([email protected])
Alexandria, VA (December 3, 1998) -- As we head into the final month of the year, big MO Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> and Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> have done the Foolish Four proud, but it looks like International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> and Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> are holding up the group. C'mon, guys, pick it up! We're behind the Standard & Poor's 500 Index!
In fairness, it looks like International Paper, for one, is trying. (That's not intended as a slight at Union Carbide, which I'll cover another day.) But IP is in a tough business. While they are the world's largest "forest products company," they are primarily manufacturing commodities, and they have the paper-thin margins (ha!) to prove it. Recently, the strong dollar, additional capacity in Asia, and the slower global economy have hurt demand for many of IP's products.
IP has been buying a variety of properties in the U.S. and abroad and trying to cut costs at the same time. It has implemented some highly sophisticated information technology systems to maximize efficiency. Yet all these moves have yet to fall to the bottom line, and this presumably is one of the reasons why the stock has little to show for the company's efforts.
International Paper makes a wide variety of products. If your office uses Hammermill, Springhill, Carolina, Strathmore, or Legacy office paper, then you're an IP customer. IP also makes paperboard and packaging. For example, Tropicana Orange Juice is distributed in IP-made cartons. Its recent $6.6 billion purchase of rival Union Camp will make it the world's biggest manufacturer of printing paper and a leading producer of packaging material.
The Union Camp acquisition is only the latest in a long line -- according to one calculation, IP has purchased 17 companies in the past five years. IP began selling $1 billion in marginal assets in 1997, a move that should reduce its workforce. In addition, this year the company announced its intention to close several plants and eliminate 2,000 jobs by early 1999, according to Hoover's. They plan to save $300 million annually through the consolidation of resources with Union Camp, and after buying Mead's distribution business this year IP announced that they would close down 25 facilities to cut costs.
Their investments in technology were impressive enough to merit an interesting New York Times article in September, which noted that IP is saving $50 million a year with enhanced technology controls in its manufacturing process. They are also using new hi-tech tools to track their products, such as electronically monitoring Tropicana delivery trucks to better determine why some of their cartons burst in transit.
Despite these efforts, the aforementioned decline in demand has reduced IP's revenue so far this year compared to '97. Costs have been cut as well, but before special items, IP's third quarter report showed a 14% decline in earnings versus the previous quarter. After special items, IP earned $21 million, versus $102 million in the year-ago period. Clearly, the measures discussed above are no match for declining demand.
Nevertheless, IP could reap some benefits from its various initiatives --earnings for the first nine months this year are ahead of last year's, despite the most recent quarter's showing. CEO John Dillon, when discussing third quarter results, stated that "While we can have little impact on macroeconomic activities, our restructuring measures and cost-reduction programs will enable us to strengthen our performance and improve our businesses, even in this environment." We shall see.
Finally, International Paper also serves as an excellent example of two things: the consistency of dividends for Dow companies, and how potential dividend changes can affect stock prices. This year, IP has paid out $0.75 in dividends per share, while having only earned $0.60 per share, after special charges; last year, IP paid out its $1 per share dividend even though it lost money. Presumably, IP expects these down years to be temporary, and therefore it's willing to keep paying its dividend. Cutting the dividend would be taken as a bad sign among analysts and would certainly distress many of their shareholders.
However, it's possible that another reason IP's stock has remained relatively flat is that some are assuming IP will cut its dividend anyway. That seems unlikely at this point, given that unlike last year, IP might at least finish this year in the black.
On a different subject, last time I wrote in this area -- two weeks ago, since last Thursday was Thanksgiving -- I discussed what had happened last year with our Foolish Four switch and asked for feedback on how we could do it better this year. Thanks to all those who responded -- the feedback was great! Those who read Ann Coleman's column last night know that we've agreed with those who suggested a real money portfolio! There are still some details to work out, and we'll be discussing those in the next couple of weeks. Until then, Fool on!
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Current Dow Order | 1998 Dow Returns
12/03/98 Close
Stock Change Last -------------------- UK - 1/2 43.38 IP - 3/8 43.44 MO -1 3/8 55.38 EK - 1/8 73.06 |
Day Month Year
FOOL-4 -1.15% -0.82% 13.21%
DJIA -2.04% -2.60% 12.28%
S&P 500 -1.80% -1.16% 18.52%
NASDAQ -2.05% 0.25% 24.45%
Rec'd # Security In At Now Change
12/31/97 276 Philip Mor 45.25 55.38 22.38%
12/31/97 206 Eastman Ko 60.56 73.06 20.64%
12/31/97 291 Union Carb 42.94 43.38 1.02%
12/31/97 289 Int'l Pape 43.13 43.44 0.72%
Rec'd # Security In At Value Change
12/31/97 276 Philip Mor 12489.00 15283.50 $2794.50
12/31/97 206 Eastman Ko 12475.88 15050.88 $2575.00
12/31/97 291 Union Carb 12494.81 12622.13 $127.31
12/31/97 289 Int'l Pape 12463.13 12553.44 $90.31
Dividends Paid YTD $1092.81
TOTAL $56602.75
</FOOLISH FOUR PORTFOLIO> |
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