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Foolish Four Companies on the Rebound?

A quick review of two companies that many Foolish Four investors hold, International Paper and DuPont, finds plenty of similarities. Both companies have fallen hard this year, are growing earnings nevertheless, and are trading at fairly low levels. International Paper is benefiting from pricing and operating improvements, while DuPont is still working to show growth in its core business.

By Chris Rugaber (TMF RFK)
August 21, 2000

Continuing our review of Foolish Four companies that many of you may hold in your portfolios, today we'll check in with two that haven't received much attention recently since they're not among our real-money holdings: International Paper (NYSE: IP) and DuPont (NYSE: DD).

International Paper's recent history
International Paper is a frequent participant in the Foolish Four. The company was included in 1998's model portfolio, and returned 28.15% for our real-money portfolio last year. This year, the company did not enter the Foolish Four listing (updated daily on our website) until early February.

It hasn't been a great year for the company so far, with its shares down 39%, but that could very well change soon. The company does seem to be executing on its plans to increase profitability, and the potential is there for an old-fashioned Dow Dog turnaround before rebalancing time comes.

International Paper's second-quarter report last month certainly provided hints of a better future. Earnings, before special charges, clocked in at $0.75 per share, a 25% increase sequentially, and triple the company's earnings of $0.24 in last year's second quarter. Those are pro forma numbers that take International Paper's recent acquisitions into account, and they are impressive.

What's behind the company's progress
Earnings growth resulted from improved prices for the company's paper and packaging products, and from internal initiatives to cut costs and achieve synergies from the June purchase of Champion International, and its acquisition last year of former rival Union Camp. As a result, while sales increased 13% in the second quarter over the year-earlier period, sales, general, and administrative (SG&A) expenses only inched up 2.6%. Gross margins also improved, from 26.3% last year to 29.6%.

Improvements in pricing are continuing, as the company announced last week that it would increase prices for various types of office papers by about 8%. As a company that makes a commodity product, International Paper is dependent on worldwide changes in supply and demand, and was hurt in previous years by various economic downturns around the world. As economies in Asia and elsewhere improve, a company like International Paper will usually benefit.

In addition, International Paper is planning to divest about $3 billion of its assets over the next 18 months, in order to increase its focus on core businesses. The company will probably use the proceeds from these asset sales to repay debt, which is good considering that International Paper is currently carrying $12.9 billion in debt on its balance sheet. While this represents a substantial increase over recent years, the company generates positive free cash flow and should be able to handle the debt over time.

Estimates of the company's future earnings range widely, but consensus estimates are for International Paper to pull in $4.98 per share in 2001. Based on Friday's closing price of $33.94, the company sports a forward P/E of 6.8. It may be a cliche, but at that level, it seems the company has nowhere to go but up.

What's up with DuPont?
Turning now to DuPont, we find plenty of similarities with International Paper: The company didn't enter Fool Four territory until mid-February, and it hasn't done so hot this year, down 22.3% so far. The optimism surrounding the company's life sciences division, which helped send DuPont's shares to a record high in mid-1998, has been replaced with the controversies surrounding bioengineered crops. In addition, the quality of the company's first-quarter earnings was diluted by a boost from pension credits.

Second-quarter earnings, released in late July, were mixed. Earnings per share grew 15% to $0.90, and sales were up 13% from the year-earlier period, which is not bad, though operating earnings only grew 7%. Per-share earnings benefited from an 8% reduction in shares outstanding, as a result of the divestiture of the company's Conoco division. As a result, DuPont may need to show greater sales and earnings growth from its core businesses to spur a recovery in its shares. The company is currently trading at 14.2x next year's earnings.

Incidentally, DuPont made an announcement last week that might have given it a nice short-term boost eight or nine months ago, when the "business-to-business" (B2B) e-commerce sector was red hot. The company announced that it will participate in a chemical B2B online marketplace with six other chemical manufacturers. The service will be called Elemica, is expected to be up and running by December, and will compete with other chemical B2B services such as ChemConnect. Despite the lack of a quick jump in the company's shares, DuPont should still benefit down the road, with reduced costs and increased sales resulting from the venture.

We'll look at some additional companies this Friday. Fool on!

Related Links:
IP Reports, Foolish Four, 7/13/99
DuPont 2Q Earnings Release, 7/26/00

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