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International Paper Gets Cut

By Brian D. Pacampara, CFA – Sep 27, 2013 at 12:20PM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of International Paper (IP 0.06%) sank 3.5% today after Deutsche Bank downgraded the paper and packaging company from buy to hold.

So what: Along with the downgrade, Deutsche lowered its price target on the stock to $51 per share (from $54), representing only about 8% worth of upside to yesterday's close. Analyst Mark Wilde thinks that the company may be investing too heavily in domestic capacity amid still-sluggish economic conditions, raising the likelihood of margin compression going forward.

Now what: Wilde now expects 2013 EPS of $3.15 (down from a prior view of $3.40) and 2014 EPS of $4.05 (down from $4.40). "Without stronger demand, IP could be forced to take more economic downtime or make permanent capacity shuts," said Wilde. "In the short-term, the issues are continued sluggish domestic c'board demand, rising inventories and some very modest pricing pressure from new capacity." With the stock still up about 40% from its 52-week lows and trading at a P/E of 20, I'd have to agree with Deutsche's view that those risks aren't being adequately discounted. 

Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

International Paper Stock Quote
International Paper
$36.17 (0.06%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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