International Paper (IP) Offers Lawsuit Settlement For $354M

Paper and packaging firm, International Paper Company (NYSE:IP) recently inked an agreement to settle the long-pending Kleen Products antitrust class action lawsuit filed in 2010 in the United States District Court for the Northern District of Illinois. The strategic move is aimed at reducing its legal expenses and end the uncertainty related to the future implications from the continued legal processes.

The lawsuit alleged that International Paper and seven other containerboard producers engaged in illegal anticompetitive conduct with respect to the sales of containerboard products. Consequently, customers were forced to pay a higher amount for such products than they would have had to pay in a competitive market.

Although International Paper refuted the allegations and refused to accept the veracity of such claims, it decided to end this bitter legal battle to avoid future hassles and a possible adverse jury verdict that could amplify the quantum of damages. The company has agreed to pay $354 million into a settlement fund to settle the case. Consequently, International Paper will record $219 million net of tax as legal costs for the expected settlement in the second quarter of 2017, subject to the court approval.

Moving forward, International Paper intends to focus more resources on high-return capital projects within its core businesses that can drive additional earnings growth. The company outperformed the Zacks categorized Paper & Paper Products industry in the last three months with an average return of 10.7% compared with an 7.2% gain for the latter. International Paper is undergoing restructuring initiatives to transform itself into a core packaging company. The company intends to invest $300 million through 2017 to further improve its North American containerboard mill system, enhance product quality, and reduce manufacturing and delivery costs. These projects are expected to have a collective internal rate of return of 20%.

In North America, the company envisions a large opportunity within its industrial packaging business, which continues to generate the best margins in the industry. The company is taking initiatives to drive further margin expansion across the business through inorganic growth. The acquisition of Weyerhaeuser Co.’s pulp business has strengthened its position in the global fluff pulp market and augmented its operating cash flow. With a combined capacity of nearly 1.9 million metric tons of pulp, the acquisition is likely 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.

However, the company remains plagued by macroeconomic challenges and volatility in raw material prices, offsetting some of its positives. Earnings estimates for the current quarter have decreased from 79 cents per share to 66 cents in the last three months, signifying negative investor sentiments for this Zacks Rank #4 (Sell) stock.

Some better-ranked stocks in the industry include Fibria Celulose S.A. (NYSE:FBR) , WestRock Company (NYSE:WRK) and Clearwater Paper Corporation (NYSE:CLW) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fibria Celulose has a long-term earnings growth expectation of 18.4%.

WestRock has a long-term earnings growth expectation of 9.1%. It has beaten earnings estimates in each of the trailing four quarters with a positive surprise of 9.8%.

Clearwater Paper has a long-term earnings growth expectation of 5.0%.

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