<FOOLISH FOUR PORTFOLIO>

Introduction to IP
Getting to know International Paper

by Chris Rugaber (TMF [email protected])

Alexandria, VA (June 3, 1999) -- Today I'd like to begin using a new, more organized format for analyzing our Foolish Four companies by posing a series of questions that help focus the discussion.

Looking at these individual companies provides excellent practice in analyzing businesses and also provides insights into the Foolish Four method. We've previously covered Caterpillar, so let's move on to International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>.

WHAT DOES INTERNATIONAL PAPER DO?

Given IP's name, you don't need to be a Sherlock Holmes to figure out its business. International Paper is the world's largest paper company. Nevertheless, it's a little more diverse than you might think. The company is organized along six lines of business.

First is the U.S. and European Papers division, which accounted for $4.87 billion, or one-quarter of 1998's $19.5 billion in revenue. This division produces office paper under the Hammermill and Springhill names, as well as coated papers for book, catalog, and magazine publishers. Formerly the largest by revenue, this division has since lagged the Distribution division.

Secondly, Industrial and Consumer Packaging produced 23.5% of IP's 1998 revenue, for a total of $4.6 billion. This division makes 3 million tons a year of packaging materials, including corrugated boxes for industrial and agricultural use and packaging for food, cosmetics, and computer software.

IP's third division is its Distribution business, which supplies printing, packaging, and graphic arts products and services through its merchant distribution business xpedx. This division brought in $5.55 billion in 1998, or 28.4% of revenues. This is one of IP's fastest-growing businesses and, in fact, was the only one to show revenue growth in 1998.

Specialty Products accounted for $1.32 billion, or 6.8% of last year's revenue. This division includes industrial papers that are used in pressure-sensitive labels, industrial sealant and tapes, and "consumer hygiene products," according to IP's 10-K (where most of this info comes from). Also part of the Specialty Products division is IP's chemical business, Arizona Chemical, $75 million worth of petroleum sales, and "fine papers" under the brand names Beckett, Strathmore, and Hammermill Premium.

Next is IP's Forest Products division, responsible for $2.52 billion in revenue, 12.9% of last year's total. "Forest Products" essentially means wood, specifically the 3.3 billion board feet of lumber, plywood, and other products the division produces annually.

Finally, there is Carter Holt Harvey, IP's majority-owned subsidiary, which is the largest forest products company in the Southern Hemisphere, providing lumber, plywood, pulp, and paper products to Asia, Australia, New Zealand, and Chile. Carter Holt Harvey produced $1.5 billion in revenue last year, or 7.7% of the company's total. Asia's troubles have not been kind to it, considering that two years ago it generated $2.08 billion in sales, or 10.3% of that year's totals.

WHAT DOES IP TELL US ABOUT THE FOOLISH FOUR?

IP raises interesting issues regarding stock prices and the different methods of calculating the Foolish Four. Using the Foolish 4.1 method, which involves ordering the ten highest-yielding Dow stocks by price and then buying the four cheapest, IP's low share price would have made it a Foolish Four company in 1996, 1997, 1998, and 1999. On the other hand, under the current RP Method, International Paper would have only been selected in 1997 and this year.

The company's low share price resulted from its 1995 2-for-1 stock split. Since then, the company has maintained consistent dividends, despite generally declining earnings (from EPS of $1.04 in 1996 to $0.77 in 1998), and its share price has traded within a $35-$60 range. The company's maintenance of its dividend at $1.00 per year is a hallmark of Foolish Four companies, surviving even when the company lost money (as in 1997). This refusal to reduce or do away with the dividend, even when business slows dramatically, is what makes a high yield a useful indicator. If companies lowered their dividends when facing financial difficulty, their yields wouldn't necessarily change even when their share prices fell.

The fact that IP's stock split was a critical factor in making it a Foolish Four company provides anecdotal evidence in support of those who argue that a low share price isn't really indicative of anything important about a stock, and therefore shouldn't be part of our criteria. Perhaps, but the RP method does go some way towards addressing these concerns, since it de-emphasizes price in its calculation. That's why it selected IP less frequently, as mentioned above, than the Foolish 4.1 method.

HOW DID IP BECOME A FOOLISH FOUR COMPANY?

IP ensured itself a place as a Foolish Four stock this year thanks in part to the bane of all commodity producers, Asia's economic collapse. This hit International Paper in two ways: first, it lowered demand for IP's products, and second, it resulted in increased supply, as the fall in Asian demand produced a general oversupply in the paper industry. The combined effects caused paper prices, and IP's revenues, to drop. The strong dollar didn't help, either. In 1998, the company's revenues declined 2.8%, from $20.1 billion to $19.5 billion.

WHAT TO LOOK FOR THIS YEAR

So far IP's stock has done fine, returning 23.56% (as of yesterday) for the Foolish Four portfolio. As a company, its revenues and earnings have been less bad than the market expected. In addition, there are signs that Asia has hit bottom and prices for IP's primary products have risen.

For example, on June 1 Bloomberg News reported that lumber and plywood prices are increasing, thanks to "strong demand from U.S. homebuilders," and paper prices are "slowly improving." This gave IP's stock a 5.5% rise to close at $52 3/4 on Tuesday.

During the remainder of the year, Foolish Four investors should look for (hope for) paper prices to increase, the company's acquisition of Union Camp to show price efficiencies, and the xpedx division to continue growing rapidly. We'll monitor these factors when the company releases its second- and third-quarter earnings.

The fact that IP's stock has improved so much already indicates that, in true Foolish Four fashion, the company's dismal condition was already priced into the stock. It's almost as if it had nowhere to go but up. What remains to be seen is how much further it has to go. Thanks to our unemotional strategy, we'll hold this stock for a year no matter what, and we won't need to make a prediction (guess) on that question.

Today's Stock Lists | 1999 Dow Returns

One of the latest Fool books is the ultimate guide to Dow Investing and some of its best variations -- order The Foolish Four: How to Crush Your Mutual Funds in 15 Minutes a Year.

(c) Copyright 1999, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Today's Stock Lists | 1999 Dow Returns

06/3/99 Close

Stock Change Last -------------------- CAT +2 1/16 60.44 JPM + 7/8 131.75 MMM - 1/16 89.25 IP -1 3/8 52.44

Day Month Year History FOOL-4 +0.52% 3.41% 25.56% 27.43% DJIA +0.81% 0.98% 16.53% 16.07% S&P 500 +0.37% -0.18% 6.04% 6.29% NASDAQ -1.19% -2.72% 9.61% 11.11% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 60.44 40.29% 12/24/98 9 JP Morgan 105.51 131.75 24.87% 12/24/98 14 3M 73.57 89.25 21.31% 12/24/98 22 Int'l Paper 43.55 52.44 20.41% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1450.50 $416.50 12/24/98 9 JP Morgan 949.62 1185.75 $236.13 12/24/98 14 3M 1030.00 1249.50 $219.50 12/24/98 22 Int'l Paper 958.12 1153.63 $195.51 Dividends Received $29.45 Cash $28.26 TOTAL $5097.09