Climbing 14% higher in 2019, shares of International Paper (NYSE:IP) failed to keep pace with the S&P 500 which soared 29%. In 2020, investors are finding a similar dynamic. While the S&P 500 sank 4% lower through the first six months of the year, International Paper has fared much worse, falling 24%.
Besides a number of pessimistic takes on the stock from Wall Street, a weak Q1 earnings report and questions surrounding the remainder of 2020 left investors unmotivated to pick up shares.
Throughout the second quarter of 2020, several analysts shone an unflattering spotlight on International Paper. In early April, for example, Adam Josephson lowered KeyBanc's price target on the stock to $29 from $38 and maintained an underweight rating, according to Thefly.com. Then, in late May, an analyst at Deutsche Bank, Debbie Jones, shared her bearish opinion, lowering her price target to $40 from $46 while keeping a hold rating on the stock. A few weeks later, Morgan Stanley joined in the fray, initiating coverage on the stock with an underweight rating and assigning it a $29 price target.
A disappointing Q1 earnings report provided investors with additional causes for concern. In part because of reduced demand for food-service companies, lower discretionary spending among consumers, and what the company characterized as a drop-off in its printing papers business, reflecting an "unprecedented decline due to impact of work-from-home and decline in print advertising," the company reported sales of $5.4 billion in the quarter, a 3.6% year-over-year decline. However, the impact of the global pandemic on the company's bottom line was significantly worse. Whereas International Paper reported net earnings of $424 million in Q1 2019, the company reported a net loss of $141 million in the first quarter of 2020. But it wasn't only the income statement that was disconcerting for investors. International Paper reported free cash flow of $363 million in Q1, an 18% decline from the $440 million it generated in Q1 2019.
Since analysts often have short-term horizons when evaluating stocks, it's usually best for investors on Main Street to take their opinions with a grain of salt. In the case of International Paper, however, the analysts' skepticism seems well warranted. Whereas some businesses have thrived during the first half of 2019, in spite of the challenges wrought by the global pandemic, International Paper has suffered. And the second half of 2020 may bring more of the same. Management contends in its Q1 earnings report that it is "unable to fully quantify the impact that the COVID-19 pandemic will have on [its] financial results during 2020, but developments related to COVID-19 are significantly adversely affecting [its] business, and could have a material adverse effect on [its] financial condition."
Investors, especially those focused on dividends, will want to monitor the coming quarters closely since ongoing challenges could compromise the company's ability to sustain its high-yielding distribution.