<FOOLISH FOUR PORTFOLIO>

IP's Financial Health
A quick check-up

by Chris Rugaber (TMF [email protected])

ALEXANDRIA, VA (June 17, 1999) -- Two weeks ago we looked at the basics of International Paper's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> business. As part of the evaluation of our Foolish Four companies, let's now turn to the company's financial statements.

We performed a somewhat less-organized version of this analysis with Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> back in March, by the way. Doing fundamental analysis of our Foolish Four companies may be unnecessary, given that they're the result of a mechanical screen, but it's good practice.

IP's financial statements reveal some interesting stuff. First, the life of a commodity company is no fun. Pricing pressure has kept IP's margins razor-thin, and they've gotten lower in recent years. Net margin (profit margin) in 1996 was 1.5%, while in 1997 IP lost money. Last year, net margin was only 1.21%. Gross margins (revenues minus costs of goods sold) were similarly low, and declining, from 26.11% in 1996 to 24.46% last year. The company's first quarter this year wasn't much better, with gross margins continuing down to 23.64% and net margins to 0.89%.

IP's competitors are generally in the same boat, however. Georgia-Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GP)") else Response.Write("(NYSE: GP)") end if %>, the second-largest U.S. paper and wood products company (behind IP), managed a gross margin in the first quarter of 25.67%, and a net margin of 2.91%. Meanwhile, Weyerhaeuser's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WY)") else Response.Write("(NYSE: WY)") end if %> gross margin was below IP's, and the company lost money in the first quarter of this year.

This simply reflects what we already know and have discussed before about IP and the "forest products" industry: it was hit pretty hard by the Asian economic downturn and suffered from global oversupply of paper products. Nevertheless, IP's stock has increased 25% so far this year on indications that paper and lumber prices are finally turning a corner and increasing. This won't appear in the company's numbers until the second quarter, however, so we would expect to see IP's margins increase in the next quarterly filing.

IP's balance sheet has improved slightly in recent quarters. Long-term debt has declined about 10% in the past 15 months, although $6.4 billion remains. Short-term debt is lower as well, and the company seems to be ever-so-slightly reducing inventories. Inventory and accounts receivable turnover rates are low, though this is not surprising for a heavy manufacturing company. In the first quarter of this year, IP sold out its inventory at an annualized rate of 5.72 times, similar to Caterpillar's. This was less often than Georgia-Pacific, their main competitor, however. (if you're getting lost in the terminology, we explained many of these concepts in an April article).

On a more positive note, cash flow from operations increased in the first quarter this year compared to 1998's first quarter. International Paper's recent acqusitions, and its almost $12 billion of property, plant, and equipment, resulted in a fair amount of what are known as "non-cash charges" to earnings -- specifically, depreciation and amortization. When calculating cash flow, those numbers are added back to earnings, among many other adjustments. As a result, while IP reported only $44 million in earnings in the first quarter this year, its cash from operations clocked in at $269 million.

Nevertheless, the company's cash on the balance sheet declined by $74 million. This was due, in part, to debt service and capital expenditures. Interestingly, had the company not paid out $77 million in dividends in the first quarter, IP could have added a smidgen of cash to its current assets. No big deal in the long run, but another example of the lengths companies will go to continue paying their dividends, for better or worse.

Fool on!

Today's Stock Lists | 1999 Dow Returns

06/17/99 Close
Stock  Change   Last
--------------------
CAT  -   1/16  58.88
JPM  +  11/16  134.69
MMM  -   3/16  90.63
IP   -2  3/16  53.31



                  Day    Month   Year   History
         
        FOOL-4   -0.89%   4.38%  26.74%  28.63%
        DJIA     +0.53%   2.67%  18.87%  18.40%
        S&P 500  +0.71%   2.93%   9.59%   9.86%
        NASDAQ   +1.05%   2.98%  16.03%  17.62%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     58.88    36.66%
 12/24/98    9 JP Morgan    105.51    134.69    27.65%
 12/24/98   14 3M            73.57     90.63    23.18%
 12/24/98   22 Int'l Paper   43.55     53.31    22.42%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1413.00   $379.00
 12/24/98    9 JP Morgan    949.62   1212.19   $262.57
 12/24/98   14 3M          1030.00   1268.75   $238.75
 12/24/98   22 Int'l Paper  958.12   1172.88   $214.76

              Dividends Received      $49.99
                             Cash     $28.26
                            TOTAL   $5145.06