By Jack Hough

International Paper deserves some attention, and I'm as surprised about that as you are. It's a lousy long-term stock performer, with zero ties to hot topics of the day, like artificial-intelligence chips, quantum computers, and cryptocurrency. Negligible ties, anyhow -- IP is largely in the box business, so to the extent that any of that stuff comes in boxes, or uses things that come in boxes, there's a connection, but no more so than for, say, avocados or shampoo.

Suddenly, International Paper shareholders are up like meme traders: 62% since the day before a new CEO was announced in March, or more than triple the S&P 500 index's return. That's a sign of a turnaround afoot, and since I recently discussed the ugliest turnaround attempts of 2024, including Intel, CVS Health, and Boeing, I might as well cover one that's off to a promising start. Also, Jefferies sees more than 20% further upside for IP stock in 2025, and calls it a top pick.

I'm wary, but intrigued. Plus, if there's a better week than the one between Christmas and New Year's to ponder empty boxes, I'm not aware of it.

So let's get into it, starting with some background and definitions -- because saying "cardboard box" when you mean "corrugated fiberboard box" might go over fine at your local UPS store, but it will get you kicked right out of next year's CorrExpo in Savannah, Ga., or so I imagine. Strictly speaking, cardboard is a single stiff layer, like a card. But the boxes your Amazon orders come in are cushiony with multiple layers, including a squiggly one in the middle.

That fluted paper was developed in England in the 1850s as a liner for top hats to make them more comfortable. It soon proved useful for wrapping glass, replacing the sawdust in wooden shipping crates. In 1874, two Americans figured out a way to replace the crates, too, by sandwiching fluted paper between two flat pieces. The corrugated box was born. Today, paper used for the job is called containerboard; the flat pieces are called linerboard; and the middle is the medium. Please don't get me started on varying flute profiles, multiwall construction, or slotted versus telescoping boxes.

IP turns wood into chips, then pulp, then paper, and then finished products, adding in recycled fiber along the way. It was formed as a merger of mills serving the newspaper industry, then went into corrugated paper during the Great Depression, and then bought one of its customers to become an integrated pulp-to-box manufacturer. Today, IP controls about one-third of the North American containerboard market. It sells all manner of specialty boxes, including berry trays and bag-in-boxes for detergents, but simple designs are its biggest sellers, including continuous, fanfold, corrugated sheets for customers with on-demand box machines.

The e-commerce age has been a boon for boxes. So how did IP fail to produce a stock price gain over the 20 years ended last year? (With fat dividends, shareholders made 83%, but they could have made 536% in the S&P 500.) That's what Andrew Silvernail is trying to figure out. Before taking over IP in May, he ran industrial company IDEX from 2011 to 2020 and made more than 500% for shareholders, and then spent time at private-equity investor KKR shopping for sector fix-'em-ups.

In the month and a half between Silvernail being announced as CEO and starting, IP agreed to a whopper takeover of a packaging company called DS Smith, adding $9.4 billion in European revenue in 2023 to IP's $1.5 billion. That transaction is expected to close in the first quarter of 2025, and IP has scheduled an investor day for March 25, where Silvernail expects to get into the nitty-gritty of his plans. For now, there are broad strokes. One key goal is to increase Ebitda, or earnings before interest, taxes, depreciation, and amortization, to $4 billion over the "medium term" from $2.3 billion last year.

The old IP emphasized volume over profitability, with a focus on keeping its plants running full-tilt. Silvernail is an evangelist for what is known as the 80/20 rule, sometimes called the Pareto Principle.

See, in 1896 -- two years before the incorporation of IP, as it happens -- an Italian economist and gardener named Vilfredo Pareto was harvesting peas when he noticed that 20% of his pods produced 80% of his bounty. He later saw this pattern in his other work -- studying how wealth was distributed in Italy, for example.

Criminologists use the Pareto Principle when they focus 80% of policing on the 20% of baddies likeliest to be repeat offenders. Manufacturers who use it assume that 80% of good stuff, like profits, comes from 20% of causes, including customers and products.

IP has announced the closure of five box plants and a pulp mill, while renegotiating rates with customers. A company unit that makes pulp for diapers and such is under "strategic review," and Jefferies reckons it could get $2 billion in a sale. It's too soon to get a clean reading on the turnaround progress from quarterly results, but Wall Street seems to be gaining confidence. Back in March, analysts were predicting $2.7 billion in Ebitda by 2026. Now they say $3.3 billion.

Meanwhile, containerboard prices are pushing higher. RaboResearch, an industry forecaster, sees 11.4% annual price growth through 2026. Jefferies says that price increases could add $200 million to $400 million to its Ebitda estimates. For now, it predicts that a combined IP and DS Smith will produce Ebitda of just over $4.8 billion by 2026.

Shares, Jefferies figures, deserve a continued rise to $66, which would give the company an enterprise value of 8.5 times 2026 Ebitda. The stock recently sold for $55. There's a 3.4% dividend yield. We'll see -- I'm 80% confident on at least 20% of the containerboard case, but don't box me in.

Write to Jack Hough at jack.hough@barrons.com

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December 27, 2024 01:00 ET (06:00 GMT)

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