Is International Paper Company Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does International Paper Company (IP 0.71%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell International Paper's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at International Paper's key statistics:

IP Total Return Price data by YCharts.

Source: YCharts. *Period begins at end of Q3 2010.

IP Return on Equity (TTM) data by YCharts.

Source: YCharts. *Period begins at end of Q3 2010.

How we got here and where we're going
International Paper got off to a hot start, and wound up missing out on a perfect score by only two grades. One of those failing grades was only awarded because International Paper's net income growth surpassed the growth of free cash flow during our tracking period -- however, the company's nominal free cash flow is twice as high as its net income. International Paper has earned seven out of nine passing grades today, and it has a very good chance to grab a perfect score when we examine it next year. But how can International Paper push its revenue growth higher over the next few quarters to grab that perfect score? Let's dig a little deeper to find out.

International Paper is on the front lines of a battle between physical media and the rising power of digital communication, which has constrained revenue growth over the past few years. Deutsche Bank downgraded the paper and packaging company from buy to hold in September as a result of this battle, citing weak demand and rising inventories, coupled with sluggish domestic macroeconomic conditions. However, International Paper still reported market topping third-quarter results, due to robust growth in cardboard packaging for shipping -- an overlooked element of global digitization that actually benefits paper companies. Fool contributor Dan Moskowitz notes that International Paper's cardboard-packaging business should continue to grow thanks to the rising number of people ordering merchandise online. Soros Fund Management seems to be keyed into that positive trend, as it's acquired an undisclosed position in International Paper.

However, Packaging Corporation of America (PKG 0.07%) has lately positioned itself to compete head-to-head with more diversified rivals such as International Paper. Packaging Corp. recently completed the acquisition of smaller shipping container competitor Boise for around $2 billion, giving it a greatly expanded packaging lineup.

Over the past few quarters, International Paper has undertaken extensive restructuring to maintain higher revenues and profitability amid difficult conditions. The company recently decided to shut down an Alabama manufacturing plant that made uncoated free-sheet paper, which has been in low demand lately. Fool contributor Rich Smith notes that International Paper also divested a 50% stake in Del-Tin Fiber in a deal worth $5.2 million, leaving the raw materials part of its business to others. In addition to this, the company also announced a $1.5 billion share repurchase program, which is expected to run over the next two to three years. With its stock currently trading at a forward P/E of 9.7, International Paper might look cheap compared to Packaging Corp.'s P/E of 14.1, but Packaging Corp.'s robust revenue growth rate of 64.2% will clearly outperform International Paper in 2014, and that ought to be cause for concern going forward.

Putting the pieces together
Today, International Paper has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.