Earnings

Critical Comparison: International Paper Company (IP) vs. WestRock Company (WRK)

International Paper Company (NYSE:IP) shares are up more than 2.51% this year and recently decreased -0.84% or -$0.46 to settle at $54.39. WestRock Company (NYSE:WRK), on the other hand, is up 15.90% year to date as of 11/13/2017. It currently trades at $58.84 and has returned -0.73% during the past week.

International Paper Company (NYSE:IP) and WestRock Company (NYSE:WRK) are the two most active stocks in the Packaging & Containers industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect IP to grow earnings at a 11.11% annual rate over the next 5 years. Comparatively, WRK is expected to grow at a 15.49% annual rate. All else equal, WRK’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 16.35% for WestRock Company (WRK). IP’s ROI is 7.90% while WRK has a ROI of 4.00%. The interpretation is that IP’s business generates a higher return on investment than WRK’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. IP’s free cash flow (“FCF”) per share for the trailing twelve months was -2.81. Comparatively, WRK’s free cash flow per share was +0.59. On a percent-of-sales basis, IP’s free cash flow was -5.5% while WRK converted 0.99% of its revenues into cash flow. This means that, for a given level of sales, WRK is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. IP has a current ratio of 1.50 compared to 1.40 for WRK. This means that IP can more easily cover its most immediate liabilities over the next twelve months. IP’s debt-to-equity ratio is 2.51 versus a D/E of 0.64 for WRK. IP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

IP trades at a forward P/E of 12.68, a P/B of 4.57, and a P/S of 1.00, compared to a forward P/E of 14.12, a P/B of 1.46, and a P/S of 1.01 for WRK. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. IP is currently priced at a -13.57% to its one-year price target of 62.93. Comparatively, WRK is -10.4% relative to its price target of 65.67. This suggests that IP is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for IP and 2.10 for WRK, which implies that analysts are more bullish on the outlook for IP.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. IP has a short ratio of 3.13 compared to a short interest of 1.49 for WRK. This implies that the market is currently less bearish on the outlook for WRK.

Summary

WestRock Company (NYSE:WRK) beats International Paper Company (NYSE:IP) on a total of 9 of the 14 factors compared between the two stocks. WRK generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, WRK has better sentiment signals based on short interest.

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