Will International Paper (IP) Retain Its Earnings Streak In Q2?

Leading packaging and paper manufacturer International Paper Company (NYSE:IP) is scheduled to report second-quarter 2016 results before the opening bell on Jul 28. In the last reported quarter, the company’s adjusted earnings comfortably exceeded the Zacks Consensus Estimate by 11 cents. In the trailing four quarters, the company beat earnings estimates on every occasion with an average positive earnings surprise of 7.91%.

Let’s see how things are shaping up for this announcement.

Key Factors in the Second Quarter

During the quarter, International Paper inked a definite agreement with leading timberland owner Weyerhaeuser Co. (NYSE:WY) to acquire the latter’s pulp business for $2.2 billion in cash. The acquired asset portfolio includes five pulp mills and two converting facilities that produce fluff pulp, softwood pulp, and specialty pulp for consumer goods such as, diapers, hygiene products, tissue, and textiles.

With a combined capacity of nearly 1.9 million metric tons of pulp, the transaction is likely to strengthen International Paper’s position in the global fluff pulp market and augment its operating cash flow. In addition, the company expects the acquisition to generate annual synergies of approximately $175 million by the end of 2018 along with a higher flexibility to manage a wide portfolio of products to meet customer needs through superior R&D capabilities and priceless patent portfolio. Although the acquisition is not likely to make any significant contribution in the to-be-reported quarter, its role in attracting potential revenue contribution from other clients is irrefutable.

Mergers and acquisitions remain a key strategy for International Paper to strengthen its long-term business proposition. In North America, the company envisions a large opportunity within its industrial packaging businesses, which continue to generate the best margins in the industry. The company is further taking additional initiatives to drive margin expansion across the business. These are likely to yield healthy bottom-line growth in the impending quarter.

International Paper is also undergoing restructuring initiatives to transform itself into a core packaging company. The company recently divested its corrugated packaging business in China and Southeast Asia. The assets were sold to Xiamen Bridge Hexing Equity Investment Partnership Enterprise, which specializes in packaging and related industries, for approximately RMB 1 billion (approximately $150 million). The held-for-sale asset portfolio included 18 manufacturing plants with employee strength of roughly 3,000. A focused initiative to invest more resources on high-return capital projects within its core businesses is likely to drive additional earnings growth in the quarter.

Earnings Whispers

Our proven model conclusively shows that International Paper is likely to beat earnings this quarter as it possesses the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for an earnings beat. This is perfectly the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is currently pegged at +2.38%.

INTL PAPER Price and EPS Surprise

INTL PAPER Price and EPS Surprise | INTL PAPER Quote

Zacks Rank: Internal Paper’s Zacks Rank #3 when combined with positive ESP makes an earnings beat likely this quarter. However, we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

LPL Financial Holdings Inc. (NASDAQ:LPLA) has an Earnings ESP of +2.33% and a Zacks Rank #3.

Federated Investors, Inc. (NYSE:FII) has an Earnings ESP of +2.13% and carries a Zacks Rank #3.

Cullen/Frost Bankers, Inc. (NYSE:CFR) has an Earnings ESP of +0.96% and carries a Zacks Rank #3.