Dollars to be Made from Paper and Diapers

06/07/2016 7:00 am EST

Focus: STOCKS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

In our increasingly digital world, it's hard to believe there’s still a need for paper, but this featured stock idea keeps turning out products, supplying everything from printing paper to industrial packing material, explains Benjamin Shepherd, editor of Personal Finance.

And now, thanks to a new acquisition, International Paper (IP) also has a growing business in diapers. IP announced that it is acquiring the fluff-pulp business from Weyerhaeuser for $2.2 billion. The deal will give International Paper a 40% share of the global fluff-pulp market.

So what is fluff pulp? If you have kids, you’ve probably dealt with a disposable diaper that got too wet and fell apart. Fluff pulp, is what gives diapers their absorbency.

Fluff pulp is a growth business thanks to the growing sales of disposable baby diapers. Sales of disposables generally have been growing at least 3% annually because of the growing demand in emerging markets.

As incomes rise and more parents work outside the home in emerging markets countries, disposable diapers have become increasingly popular and necessary, when they were once an unaffordable luxury.

Sales of adult diapers are also driving demand for fluff pulp. A $1.8 billion market last year in the US alone, adult diaper sales are expected to grow 48% by the end of this decade to $2.7 billion as our population ages.

Globally, the market will likely be worth at least $10 billion by the end of the decade, and that’s a conservative estimate.

That potential has yet to show up in the company’s revenue, which dropped slightly in the first quarter, with total sales of $5.1 billion, compared with $5.4 billion in the fourth quarter and $5.5 billion a year ago.

Most of that decline was due to the sale of one of International Paper’s joint ventures with a Chinese maker of coated board, which wasn’t particularly profitable.

International Paper’s net earnings of 81 cents per share in the quarter were not only a large sequential improvement but also a decent gain on the 74 cents made in the same period last year.

There were some special charges associated with a recent plant conversion and the sale of the Asian joint venture, as well as some pension adjustments.

As a result, operating earnings per share totaled 80 cents compared with 87 cents in the fourth quarter and 84 cents a year ago. Buy International Paper under $60.

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By Benjamin Shepherd, Editor of Personal Finance

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