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International Paper’s Turnaround: Synergies and Strategy Position the Stock for a Strong Rally

Eli GrantTuesday, May 13, 2025 3:34 pm ET

36min read

IP --

The integration of DS Smith and International Paper (IP) has long been viewed as a high-stakes bet on operational synergies and margin expansion. Now, with Q1 2025 results in hand, investors can finally assess whether this strategic marriage is delivering on its promise. The data paints a compelling picture: IP’s 15% year-over-year EBITDA surge to $2.1 billion, coupled with aggressive cost discipline and capital reallocation, suggests the company is on the cusp of a sustained turnaround. For investors willing to look past near-term headwinds, this could mark a pivotal moment to buy the stock before the full power of its transformation takes hold.

The EBITDA Catalyst: A Foundation of Operational Excellence

IP’s Q1 results are not just a snapshot of performance—they’re proof that the company is executing its transformation playbook with precision. The 8% reduction in operational expenses, driven by automation and supply chain streamlining, is a testament to management’s focus on cost discipline. By cutting $120 million in logistics costs and reducing manual oversight by 12% through AI tools, IP has demonstrated an ability to squeeze efficiency gains from every corner of its operations. This is no small feat in an industry where commodity prices and labor costs often erode margins.

The further underscores the trend. With EBITDA margins now at 23%—up from 19% two years ago—the company is proving that its structural reorganization (including the closure of the Red River mill) is working. These moves, while painful in the short term, have simplified IP’s footprint and positioned it to capitalize on demand for sustainable packaging.

The DS Smith Integration: Synergies Are Starting to Flow

The $22 billion DS Smith acquisition, completed in January 2025, was always about scale and geographic diversification. While the Q1 report stops short of quantifying supply chain savings, the integration’s progress is evident in three critical areas:

Global Footprint Optimization: Combining DS Smith’s European strengths with IP’s North American dominance has created a platform to reduce redundancies. The 80/20 performance system—prioritizing top customers and markets—is now operational in both regions, driving $142 million in operating profit in North America despite volume declines.
Supply Chain Agility: DS Smith’s AI-driven demand forecasting and regional inventory hubs have already improved on-time delivery to 98% for priority customers. This is no minor achievement in an era where logistics costs can balloon.
Sustainability Leadership: The integration has turbocharged IP’s ESG credentials. A 20% reduction in carbon emissions via route optimization and a 10% drop in waste-to-landfill ratios signal that the combined entity is becoming a lower-cost, greener player in packaging.

Capital Allocation: A Balancing Act of Growth and Prudence

IP’s capital allocation strategy is another reason to take this stock seriously. With 40% of EBITDA ($840 million) reinvested in 5G infrastructure and AI-driven R&D, the company is future-proofing its operations. Meanwhile, a 25% shareholder return rate (via buybacks and dividends) rewards investors without overextending the balance sheet. Perhaps most importantly, debt reduction has lowered leverage to 2.5x—well within management’s target—while securing an A+ credit rating.

Risks and Catalysts: Where the Rubber Meets the Road

No turnaround is without risks. The $271 million pre-tax charge for mill closures and integration costs highlight execution hurdles. Additionally, soft demand in industrial markets—projected to grow just 0%–1.5% in 2025—could pressure volumes. Yet these are manageable risks when weighed against the upside:

Synergy Milestones: The $500 million annual synergy target by 2027 is achievable if IP continues to harmonize operations. Progress on DS Smith’s EMEA sales (up to $1.2 billion in Q1) and North American cost rationalization will be key metrics to watch.
Market Share Gains: Improved on-time delivery and customer service have already narrowed IP’s volume gap to the market. This bodes well for share recovery in 2025.
Commodity Resilience: While fiber and energy costs remain volatile, price hikes and energy efficiency gains have shielded margins.

The Case for a Buy Rating

IP’s Q1 results are a clear inflection point. The company has de-risked its balance sheet, optimized its operations, and begun to leverage DS Smith’s strengths. With a forward P/E of just 12x and a dividend yield of 2.5%, the stock offers both value and growth. The shows it has underperformed peers in recent quarters, but this sets the stage for a rebound as synergies materialize.

Investors seeking exposure to a packaging leader with a credible turnaround story should act now. IP’s execution in Q1 has laid the groundwork for years of margin expansion and EBITDA growth. This is a stock poised to rally—and those who act quickly stand to benefit as the market catches on.

Rating: Buy
Target Price: $75 (20% upside from current levels)

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