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Stock Analyst Update

International Paper Wraps Up a Solid Quarter

Profits are up, but recession fears have taken a toll on its price.

International Paper's (IP) earnings were good news for the paper industry. Tuesday morning, the industry leader and Dow component reported earnings of $0.75 a share before special items, a penny above Wall Street estimates and three times earnings from the year-ago quarter. Including a $45 million restructuring charge related to its acquisition of Champion, International Paper's net income was $0.64 a share.

International Paper is the world's largest paper company, with operations in all major areas of the industry, so it's seen as a bellwether. Some people feared that weakness in the company's results could be an early sign of a slowdown in the U.S. economy, which would badly hurt the paper industry. But International Paper's solid numbers assuaged those fears. Strong prices in the second quarter offset slightly weaker-than-expected demand, and CEO John Dillon was upbeat about conditions over the next few quarters. Paper stocks in general were up Tuesday, riding the coattails of International Paper's 6% rise.

Higher prices weren't the only reason for the company's solid numbers. The firm has been making a concerted effort over the past year to cut costs and boost efficiency, and those efforts are bearing fruit. Some of these cost improvements have been synergies from International Paper's merger last year with Union Camp. Dillon said he expects to reap $425 million in additional savings from the company's merger with Champion, completed three weeks ago.

Dillon also said that International Paper will sell $3 billion worth of assets within the next 18 months, including its oil and gas, chemical-cellulose, and flexible-packaging businesses. These sales will allow the company to focus on its three core businesses--paper, packaging, and forest products--while paying down most of the $5 billion in debt it accumulated in acquiring Union Camp and Champion.

International Paper turned in a solid quarter with few surprises. That's a good thing, given that its stock is down 40% this year and the entire paper industry has been in the doldrums. Even if it continues to do things right, though, International Paper's stock is unlikely to recover fully until interest rates stop rising and the threat of a recession recedes some more.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.