<FOOLISH FOUR PORTFOLIO>

IP Reports
Earnings up, but questions remain

by Chris Rugaber (TMF [email protected])

Alexandria, VA (July 13, 1999) -- Today, Foolish Four holding International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> reported second quarter earnings of $0.24 per share, beating analysts' consensus estimates of $0.22 (or $0.23, depending on who you read). After "special and extraordinary items," the company reported a loss of $0.17 per share, but the 24 cent profit is what counts when assessing the company's ongoing performance.

IP also restated prior earnings to reflect its Union Camp acquisition. As a result, first quarter 1999 earnings are now officially $0.08 per share, restated from $0.14. And last year's second quarter earnings are now $103 million, so this quarter's $99 million is 3.9% lower than last year's, which is not bad given that the paper markets are still recovering from the usual litany of problems we've recited before: Asian recession, resulting global oversupply, declining prices for paper products, etc.

The market didn't seem thrilled with the numbers, however, as IP fell quickly after reporting at 2pm today. The stock recovered much of the loss, however, and ended the day down only $1/2. This was after a small run-up prior to the earnings report, with IP gaining $1 3/4 Monday.

On a conference call for reporters this afternoon, IP's CFO John Faraci emphasized the company's earnings growth, from this year's first quarter income of $32 million to the second quarter's $99 million, and stated that IP saw "pricing improvement in all businesses except coated papers" from the first to second quarters this year. He also stated that this should continue into the 3rd and 4th quarters this year but admitted that prices are not yet back to where they were a year ago. Of course, this conference call should have been open to individual investors rather than just the media, but I didn't have time to raise that point, unfortunately.

International Paper now expects to realize savings of $425 million from the merger with Union Camp, and Faraci stated that $130 million of that would drop to the bottom line this calendar year. He emphasized that the combination of price improvements and cost reductions would be an excellent dynamic for the company.

Thanks to demand from builders, the company's "forest products" (wood, lumber) sales increased by $100 million over last year. And IP's distribution business continued to grow strongly, with earnings of its xpedx business growing by 13 percent. Xpedx supplies printing, packaging, and graphic arts products and services.

CEO John Dillon was unsurprisingly bullish in the company's press release: "Looking forward, market conditions are more favorable than we've seen in some time.... In most of our paper and packaging businesses as supply and demand are coming into balance, the negative effects of Asia are moderating, and the outlook for world economies remains strong... prices for all our major products are improving."

We shall see. Price improvements are good, but much of that is already built into the stock -- remember, IP has returned 25.8% this year, before dividends. Since the company's product prices are still below 1998 levels, the company has a ways to go before it can claim a full recovery.

Finally, IP took a lot of one-time charges this quarter, most related to its Union Camp merger, but also $113 million for "shut down of excess internal capacity and cost reduction actions," according to its press release. It'll take awhile to sort through all that, and hopefully we'll have a better picture of cash flow after the company's 10-Q filing. On the whole, IP seems to be moving in the right direction, but there's still a lot of wait-and-see regarding the merger, the company's restructuring, and prices for its products. But hey, we're all holding the stock another six months or so anyway.

IP was the first of our Foolish Four to report earnings this quarter. Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> will report earnings on Friday, while J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> will report this Monday. 3M <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> will report on July 30th. Let's hope it's nothing but good news!

Today's Stock Lists | 1999 Dow Returns

07/13/99 Close

Stock Change Last -------------------- CAT -1 1/8 59.88 JPM -2 5/16 138.25 MMM - 6/49 89.44 IP - 1/2 53.00

Day Month Year History FOOL-4 -0.46% 1.42% 27.55% 29.44% DJIA -0.23% 1.86% 22.50% 22.01% S&P 500 -0.40% 1.52% 13.95% 14.22% NASDAQ -0.44% 3.45% 26.70% 28.44% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 59.88 38.99% 12/24/98 9 JP Morgan 105.51 138.25 31.03% 12/24/98 22 Int'l Paper 43.55 53.00 21.70% 12/24/98 14 3M 73.57 89.44 21.57% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1437.00 $403.00 12/24/98 9 JP Morgan 949.62 1244.25 $294.63 12/24/98 14 3M 1030.00 1252.13 $222.13 12/24/98 22 Int'l Paper 958.12 1166.00 $207.88 Dividends Received $49.99 Cash $28.26 TOTAL $5177.63