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Investing.com -- JP Morgan initiated coverage on International Paper with an Overweight rating and a $59 price target, citing the company’s new profitability strategy and the potential benefits from its acquisition of DS Smith.
IP’s "80/20 strategy" focuses on improving margins by prioritizing high-value accounts and reducing exposure to lower-margin business. JP Morgan believes this shift, along with potential capacity reductions, could strengthen IP’s competitive position in the U.S. corrugated packaging market.
“IP’s profitability turnaround is centered on optimizing its cost structure and focusing on value over volume, which could lead to improved market tightness and pricing power,” JP Morgan wrote.
IP aims to double EBITDA from $2 billion to $4 billion over the medium term by aligning costs with contract profitability and streamlining operations.
The company may close some less profitable production assets, particularly in low-margin export markets, which could help increase U.S. operating rates above 95% in the next 2-3 years—a level historically associated with price increases of 2-4% ahead of costs.
The DS Smith acquisition expands IP’s presence in Europe, potentially opening opportunities for long-term consolidation in the region.
JP Morgan notes that achieving $4 billion in EBITDA would require IP’s U.S. industrial packaging division to reach profitability levels comparable to market leader Packaging (NYSE:PKG) Corporation of America—a challenging but not impossible goal.
JP Morgan expects IP’s March 25 Capital Markets Day to provide more details on its financial targets and integration plans. The bank also sees potential for $1.2-1.6 billion in annual share buybacks, which, if announced, would likely be well received by investors.
Additionally, JP Morgan anticipates an update on the strategic review of IP’s Global Cellulose Fibers (GCF) business, which could lead to a divestiture, further enhancing capital return capacity.
While JP Morgan rates IP as Overweight, it maintains Smurfit Westrock (NYSE:WRK) as its top pick in the sector, arguing that the stock’s ~25% discount to IP is unjustified.