International Paper Gets Cut

International Paper Gets Cut

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of International Paper sank 3.5% today after Deutsche Bank downgraded the paper and packaging company from buy to hold.

So what: Along with the downgrade, Deutsche lowered its price target on the stock to $51 per share (from $54), representing only about 8% worth of upside to yesterday's close. Analyst Mark Wilde thinks that the company may be investing too heavily in domestic capacity amid still-sluggish economic conditions, raising the likelihood of margin compression going forward.

Now what: Wilde now expects 2013 EPS of $3.15 (down from a prior view of $3.40) and 2014 EPS of $4.05 (down from $4.40). "Without stronger demand, IP could be forced to take more economic downtime or make permanent capacity shuts," said Wilde. "In the short-term, the issues are continued sluggish domestic c'board demand, rising inventories and some very modest pricing pressure from new capacity." With the stock still up about 40% from its 52-week lows and trading at a P/E of 20, I'd have to agree with Deutsche's view that those risks aren't being adequately discounted.

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