IP is a buy with low conviction; needs evidence of management turnaround (one quarter of improvement) to increase confidence.

The management team at International Paper informed investors that the macroeconomic headwinds are worse than expected. Previously, the management team was estimating $50 million in macroeconomic headwinds this year.

They upgraded that to $150 million citing elevated transportation costs, higher corrugated containers costs, and increased employee health expenses.

The management team hopes to make up for those increased costs by increasing prices and they expect the second half of this year to generate better profitability than the first half.

But is International stock a buying opportunity? I should say International Paper.

So, International Paper's revenue on a trailing 12-month basis has been volatile over the previous decade. It started at around $21 billion, fell as low as $17 billion before recovering to $24 billion over the trailing 12-month period.

The company's North American box transport rate increased by 1.7% in the first half of the year despite the overall market declining.

The decreasing economic activity is a significant headwind for International Paper. As the management team mentioned, costs are increasing and they have been increasing for several years.

The operating profit margin peaked at around 13% in 2019 and has trended downward ever since. Over the trailing 12-month period, its operating profit margin was barely positive at 0.9%.

Similarly, the company's returns on invested capital have been trending downward. Over the trailing 12-month period, the returns on upper invested capital totaled -9.6%. Now, the management team is implementing changes to try and turn things around, but it remains to be seen if those changes will be effective.

So, given these trends I observed in the company's performance in recent years and the increase in macroeconomic headwinds being worse than expected, I wouldn't expect this stock to be trading at a premium valuation.

And it's not. At a forward price to earnings of 11.4, the stock is trading at about half the price of the average stock in the S&P 500, and I still think that's expensive for a business in this kind of situation.

I would like to see this business, and I would like to buy a business like this at a much lower forward PE ratio in the single digits, in the mid single digits, not even in the high single digits.

Now, I'm forecasting a significant drop in the company's free cash flow in 2026, down from 840 million in 2025 to 360 million this year.

But, the analysts on Wall Street suggest that the recovery could boost the company's free cash flow going forward. I've incorporated those estimates into my estimates and forecasting significant recovery in 2027 for International Paper with free cash flow coming in at 1.3 billion.

From that point forward, I'm estimating slower growth from that point until the very long run. Now, incorporating those estimates, I calculated a fair value of $43 for International Paper.

Compared to the current market price of $34, I've calculated an upside of 26%. However, when looking at valuation comprehensively, I will say that the business looks fairly valued to slightly undervalued when incorporating the forward PE ratio as well as the company's discounted cash flow model.

Now, the share price is performing relatively well in 2026 given all of those headwinds I highlighted earlier, given the declining profitability and declining returns on invested capital.

The stock is down only 13% despite those headwinds, and I think that's a strong performance. I think that's a stock market investor community that has confidence in this management team's ability to turn things around and the macroeconomic headwinds subsiding with the management team forecasting significantly better profitability in the second half of 2026.

I will say I am less confident in the management team's ability to turn things around than the average analyst on Wall Street. However, the valuation does look appealing if the company is able to deliver on that forecast of better profitability starting in the second half of this year.

So, I am ranking International stock a buying opportunity, but with a low confidence level, a low conviction level in this ranking.

I want to see at least one quarter of improving performance from the management and more evidence that the second half of this year will bring better profit before I get stronger conviction on this buy ranking.