International Paper Company (IP): Best Timber Stock to Invest in Now?

We recently made a list 15 Best Timber Stocks to Buy Now. In this article, we’ll take a look at how International Paper Company (NYSE:IP) stacks up against other companies in the timber industry.

The lumber market has been plagued by significant volatility in recent years, driven by a confluence of dynamic and interconnected factors. Lumber prices soared to unprecedented levels in 2021 as the COVID-19 pandemic disrupted supply chains, increased demand for home construction, and logistical challenges further strained the market. However, that peak was followed by a dramatic price correction as these extraordinary conditions began to stabilize. Today, lumber prices have fallen 75% from their May 2021 high of $1,514 per thousand board feet to just $366, closely matching pre-pandemic levels. The futures market has mirrored this decline, with July contract prices down 28% to $466. The chart below from the U.S. Bureau of Labor Statistics clearly shows the change in lumber prices over a five-year horizon.

The sharp decline in lumber prices reflects a slowdown in both new home construction and renovations, largely due to high home prices and high mortgage rates that have reduced housing affordability. That has led to a drop in demand for lumber, with a significant 52% year-over-year decline in multifamily housing starts and a 2% decline in single-family housing starts since May, according to Fortune. In addition, the home renovation market, which previously supported high lumber prices, is also weakening. Retailers like Home Depot are seeing sales declines, especially for larger projects.

On the supply side, the lumber industry added capacity during the boom years, anticipating continued high demand. However, this new supply is now coming to market at a time when demand is low, exacerbating the oversupply situation. Experts predict that lumber prices could remain at current levels through the end of 2024, with a small increase possible. Looking ahead to 2025, some mills could cut production, and lower interest rates could spur a modest recovery, potentially pushing prices to $500-$600 per thousand board feet. Investors should be aware of ongoing volatility and regional price swings when considering opportunities in the lumber market. For those looking to navigate the best lumber stocks to buy, the S&P Global Timber & Forestry (GTF) Index provides a valuable point of reference. Designed to measure the performance of companies involved in the ownership, management, or upstream supply chain of forests and timberlands, the index aims to have a component count of 100. This includes forest products companies, timber REITs, paper products companies, paper packaging companies, and agricultural companies operating in these sectors. As of August 1, 2024, the index has shown a solid 10-year annualized return of 4.24%, currently valued at 2012.10. This performance underscores the stability and growth potential of the index, making it a key consideration for investors in the timber and forestry sector.

According to a report by Timberland Investment Resources, investing in timber comes with several significant benefits and considerations. Timber is a tangible asset that serves as a natural hedge against inflation. As inflation rises, the value of timber often increases, which helps preserve purchasing power. This characteristic makes timber an attractive option for investors seeking protection from inflationary pressures. Additionally, timber offers significant portfolio diversification due to its typically lower volatility compared to traditional stocks. This reduced volatility can contribute to more stable long-term returns, making timber an attractive choice for investors looking to balance risk and reward. In addition to capital appreciation, timber investments can also generate a steady stream of income through the harvesting of timber. This dual benefit of income and appreciation makes timber a valuable asset class for long-term investors.

The report also highlights the importance of sustainable management practices in forest investments. Effective management is key to maintaining the health and productivity of forests while adhering to environmental standards and promoting ecological balance. Sustainable forest practices, such as selective logging and reforestation, ensure that forests remain productive and environmentally sound in the long term. By implementing these practices, investors can mitigate negative environmental impacts and support the economic viability of their forest assets. Sustainable management not only helps preserve asset value, but also complies with increasing environmental and regulatory expectations.

However, the report also identifies several risks associated with investing in forest land. Timber prices can be highly volatile, influenced by fluctuations in supply and demand, which can affect profitability. In addition, forest land is vulnerable to natural disasters such as forest fires, storms and pest infestations, which can cause significant damage and affect profits. Regulatory changes and evolving environmental policies also pose risks, potentially affecting operational aspects of forest land management. To effectively manage these risks, the report emphasizes the importance of selecting well-managed forest land and working with experienced forestry professionals. Proper due diligence and active management are essential to mitigate these risks and maximize the potential of forest land investments. Overall, while forest land offers stable growth and diversification benefits, it requires careful management and a long-term perspective to fully realize its potential.

The UN Food and Agriculture Organization (FAO) is predicting a 37% increase in the consumption of primary processed wood products by 2050, according to a recent report. This increase includes materials such as sawn timber, plywood and wood pulp, which are expected to reach 3.1 billion cubic meters. The increase is expected to be even higher, up to 23%, if modern wood products such as structural timber and man-made cellulose fibers become more popular in replacing non-renewable materials. The renewable and versatile nature of wood makes it a key player in efforts to replace non-renewable resources and combat climate change. The FAO emphasizes the need for sustainable forest management and increased production from both naturally regenerated and planted forests to meet future demand. Investments totaling about $40 billion per year will be needed to increase production, with an additional $25 billion for modernization. The sector may face challenges in maintaining employment levels and providing adequate training for a more sophisticated workforce. As demand for wood energy increases, especially in developing regions, balancing traditional use of firewood with modern biomass energy will be crucial.

According to the National Association of Home Builders (NAHB), single-family home construction is expected to grow in 2024 despite ongoing supply-side challenges. Higher interest rates have weighed on the housing market over the past two years, but with the Federal Reserve predicting a rate cut in the second half of 2024, mortgage rates are expected to fall. That should spur home construction, although supply-side issues, such as rising prices and shortages of materials and labor, will persist. The NAHB projects single-family construction will grow 4.7% in 2024 and 4.2% in 2025, but notes that this growth will not fully address the national housing deficit of about 1.5 million units. Despite the projected growth in construction, the multifamily market faces challenges, with a 19.7% decline in multifamily housing starts in 2024 due to tight credit conditions. However, with a large number of units under construction, rent growth is expected to slow, potentially softening inflation. Developers remain optimistic, with most planning to increase their activity, although they face obstacles including high regulatory costs and fluctuating land prices. Demand for housing continues to shift, and different generational preferences are influencing market dynamics. Meeting these challenges requires balancing new construction with sustainable practices and increased housing supply.

Our methodology

We’ve selected holdings in the iShares Global Timber & Forestry ETF, sorted them by the number of hedge funds in each stock, and listed the 15 most popular timber and forestry stocks below. Essentially, our articles show the best timber and forestry stocks to buy, according to hedge funds.

International Paper Company (NYSE:IP)

Number of hedge fund owners: 37

International Paper Company (NYSE:IP) produces and sells renewable fiber packaging and pulp products in North America, Latin America, Europe, and North Africa. It operates in two segments: Industrial Packaging and Global Pulp Fiber. In its latest earnings report, announced July 24, International Paper Company (NYSE:IP) reported normalized earnings per share of $0.55, beating expectations by $0.13, while GAAP earnings per share were $1.41, beating estimates by $1.00. Revenue was $4.73 billion, missing estimates by $31.67 million. The company’s forward dividend yield is 3.94%, with an annualized payout of $1.85. The last declared dividend is $0.46, with an ex-dividend date of August 15, 2024 and a payment date of September 16, 2024. The forward P/E ratio is 29.18, indicating a higher valuation relative to earnings.

In the first quarter of 2024, the number of hedge funds with positions in International Paper Company (NYSE:IP) increased from 31 to 37, according to Insider Monkey’s database, which tracks 920 hedge funds. The combined value of these holdings is about $756.33 million. During this period, Edgar Wachenheim’s Greenhaven Associates became the largest shareholder among these hedge funds.

Total IP takes 3rd place on our list of the best timber stocks to buy. While we recognize the potential of IP as an investment, our belief is based on the belief that AI stocks offer a better chance of achieving higher returns, and in a shorter time frame. If you are looking for AI stocks that are more promising than IP but are trading at less than 5 times earnings, check out our report on cheapest AI action.

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Disclosure: None. This article was originally published on Insider Monkey.