Barron's Streetwise - The Box Episode

Episode Date: December 27, 2024

Don’t say cardboard—it’s corrugated fiberboard. Jack discusses International Paper’s stock tear, plus Nike’s slump. Jackson can’t give away his clothes. Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. This is the Empty Box episode. It's the week between Christmas and New Year's. If you've celebrated Christmas, you might have a home full of empty boxes.

It's a great time to think about boxes and the companies that make them, including International Paper. I'm Jack Howe. This is the Barron Streetwise podcast with me, Jackson Cantrell, our audio producer. How about that? Oh my gosh. I was wondering where that was going and you stuck the landing so well.

I don't know where I stuck it, but I stuck it somewhere. It's the no room left in the recycling bin week. So you put all your cardboard in the living room in a big stack. And there's never really a good time to talk about international paper, usually. Usually. Because when you look at the stock, if you go through last year, through the end of last year, that company went 20 years without producing a stock gain, which is shocking. I know

it's a paper company in a digital age, but it's mostly a box company, which I'll explain in a moment, during the age of e-commerce, which that's been a boon for boxes. So how do you go 20 years with no stock gain? If you count the dividends, the stock does have a fat dividend. So with that, shareholders made 83% over those 20 years, but they could have made 536% in the S&P 500 index. But this is a new day for IP. Shares are up 62% since the day before a new CEO was announced in March. And that is more than triple the S&P 500 return. And I think it's a sign of a turnaround afoot.

And on this podcast, we recently discussed some ugly turnaround attempts of 2024. Those included Intel, CVS, and Boeing. So we might as well talk about a turnaround that's off to a promising start. And that's off to a promising start, and that's international paper. And the investment bank Jefferies sees more than 20% further upside for shareholders from here in 2025. They call it a top pick. I'll come to that too in a moment. Do you think there's a single other finance podcast doing a deep dive into a paper company? That I can't tell you. There's surely a couple of good paper podcasts

out there i don't want to make any guesses as to what's better the paper podcast or the finance podcasts but there's there's quite a few i'm i'm looking there's a podcast called paper cuts nice uh paper talk the paper pulledp and Paper Radio International. Don't Box Me In? Is there one called Don't Box Me In? This one's called Talk Paper Scissors. Well, I don't want to get into competition with those guys, but I do want to start off with some background and a couple of definitions here.

Jackson, you order stuff from Amazon. It arrives at your doorstep and it's in a box. And what do you call that box? And this is a setup. And if you say the wrong term here, I'm going to pounce on you like a wild animal. And the righteous fury of the paper industry will be right behind me because they're tired of it, frankly. Go ahead, Jackson. A cardboard box.

Oh, how dare you, sir? How dare you? The proper name is corrugated fiberboard box. Allow me to explain. You see, cardboard, that's a single stiff layer. That's like what a card is made from. But the boxes that those Amazon orders come in, they're cushiony, right? They've got multiple layers.

They've got that squiggly layer in the middle. I'm going to need some 19th century origin story music here, Jackson. On it. So that squiggly paper, the fluted paper, that was developed in England in the 1850s as a liner for top hats to make them more comfortable. But before long, it gained use for wrapping glass. It would replace the sawdust that was in wooden shipping crates. And in 1874, two Americans figured out a way to replace the crates themselves.

What they did was they sandwiched the fluted paper between two flat pieces of paper and the corrugated box was born. Today, the paper that's used for that job is called container board. The flat pieces are called liner board and the middle is called the medium. And I got a lot to say here on varying flute profiles and multi-wall construction and slotted versus telescoping boxes, but we're going to have to save it for a different episode. Now, International Paper, what they do is they turn wood into chips and chips into pulp and pulp into paper and paper into finished products. And they add in

recycled fiber along the way. The company was formed as a merger of mills that served the newspaper industry, but then it went into corrugated paper during the Great Depression. And it bought one of its customers to become an integrated pulp-to-box manufacturer. Today, IP controls about one-third of the North American container board market, sells all kinds of specialty boxes, berry trays. It's got bags and boxes for detergents, but Simple Designs are its biggest sellers. Regular folding boxes and continuous fan-fold corrugated sheets. Those are for customers who have their own on-demand box machines. So we got a box company in the digital age and with the growth of e-commerce, wouldn't

you think that the stock would be going gangbusters? You'd think so. And that's what Andrew Silvernail is trying to figure out. He's the new CEO. And before taking over at IP in May, he ran an industrial company called Idex from 2011 to 2020. He made more than 500% for shareholders. So he has turnaround credibility. In the roughly month and a half between when Silvernail was announced as CEO in the spring and when he started, IP agreed to a whopper takeover of another packaging company

called ds smith that gives it a big expansion in europe and that transaction is expected to close in the first quarter of 2025 ip has already scheduled an investor day for late march and that's when silvernail expects to get into the nitty-gritty of his plans, but we already know a few broad strokes. One key goal is to increase EBITDA, that's earnings before interest, taxes, depreciation, and amortization. It's a measure of core profits. He wants to increase those to $4 billion over the medium term from $2.3 billion last year. I'll take medium term to mean a few years. billion last year. I'll take medium term to mean a few years. So how is he going to do that? The old IP, it emphasized volumes over profitability. There was a focus on maximizing output from plants. And Silvernail is an evangelist for something called the 80-20 rule.

Sometimes it's called the Pareto principle. Jackson, have you got more of that 19th century flashback music? I'm pulling out the gramophone now. The year was 1896. It was two years before the incorporation of international paper, but that's besides the point. An Italian economist and gardener named Vilfredo Pareto was harvesting peas, and he noticed that 20% of his pods produced 80% of his bounty. And he later saw that same pattern in his other work, studying how wealth was distributed in Italy, for example. Now, that's become known as the Pareto Principle, and you see it in a lot of different places.

Criminologists use it when they focus 80% of policing on the 20% of offenders who are likeliest to become repeat offenders. When manufacturers use it, they assume that 80% of the good stuff, like profits, comes from 20% of causes, including customers and products. So for IP, that means it has already announced the closure of five box plants and a pulp mill. It's renegotiating rates with its customers. There's a company unit that makes pulp for things like diapers. That's under strategic review. And Jeffries, the investment bank, figures it could get $2 billion in a sale. It's too soon to see the results of these efforts

in quarterly results, but there's a sign that Wall Street is gaining confidence. Back in March, analysts were predicting $2.7 billion of EBITDA by 2026. Now they're up to $3.3 billion. A lot of this hinges on container board prices, but those are pushing higher. There's an industry forecaster called Rabo Research. They see 11.4% annual price growth through 2026. Jefferies says that price increases could add $200 million to $400 million to its EBITDA estimates. It already predicts a rapid rise in EBITDA for a combined IP and DS Smith through 2026. And it figures that shares deserve a continued run up to $66 a share from a recent 55. So that's 20% more upside and there's a 3.4% dividend yield. And that is the case on international paper. I'm always a little wary when there's a stock that usually doesn't go anywhere and suddenly it's up 60% and someone's calling for another

20% upside. But sometimes that's just the beginning of years of improvement. So we'll see. Jackson, questions on international paper, on container board, on fluting. Is there a worry that packages will use less paper? Packages might use less paper in their construction, but I guess the key is what will be the total cost of the package. And even if they use less paper, there's offsetting factors. Like IP talks about its berry cartons. It's got these cartons that are made from paper to hold berries. And then they've got a thin layer

of film over the top. And it says those are a good alternative to those plastic clamshell containers that berries typically come in. So it's a paper versus plastic thing going on in the berry aisle. And there's a lot of areas like that where paper would like to take market share. What about in top hats? Top hats? I'm afraid that market might have peaked according to the Pareto principle. I think that's the part of the 80% that only produces the 20%. I don't think that's a big growth market. They'll spin that one off. Yeah, probably. All right, let's take a quick break, and then we'll come back. I'm going to say a few words about a company which is badly in need of a turnaround right now, which is Nike. Welcome back, Jackson.

What are you wearing on your feet these days? Talk to me about sneakers and brands. What do you got? I'm wearing some Adidas Superstars. That's a casual shoe? It's a casual shoe, and I think it's been around for a long time. I don't know if you've – what did you play basketball in? Oh, you don't even want to know. I played basketball a hundred years ago during the tight shorts era and shoes. I don't

want to get into an overshare here, but I think at one point I was wearing, you know how people wear those canvas Chuck Taylor sneakers because they're fashionable. Well, I wore them because at the time canvas was cheaper than leather. The family didn't have a ton of money to put into sneakers. I think one year I wore, my grandmother bought me a pair. There used to be something called a blue light special at a store called Kmart. This is where they just pile a ton of cheap stuff in the middle of the store. And there would literally be a blue police light that would go off and people would scramble for the deal. And there was a pair of Wilson's that my grandmother picked up for me for $5 on a blue light special at Kmart. So it was Wilson's one year. She wrestled it out of another grandma's hand.

That's awesome. Exactly. Thanks grandma. All right. Well, Adidas is a longtime leader in casual shoes. Nike might have pushed too far into casual shoes, and I think that has hurt the company. We'll talk about that in just a moment. I just want to take a minute for some outrage, some personal outrage, if I could. Yeah. Because I've said before that I was a longtime New Balance man. And New Balance was like a dad sneaker. And I remember one time, I think on this podcast, we played some clips from

there was a Saturday Night Live spoof commercial where they made fun of basically the dorks who wear New Balance shoes. And for whatever reason, I decided I'm going to step out from my New Balance habit, and I'm going to try some different things. And one of those was the new Hoka sneakers. Okay. So while I was away from New Balances, there's a trade publication called Brand Vision that published an article that said that New Balance has suddenly gone from dorky to desirable. gone from dorky to desirable. That's a quote and a quote streetwear icon. I'm out the door and immediately New Balance is cool is what's going on here. It's a streetwear icon. Causation correlation. I got news for you, New Balance. I'm back. All right. I just bought a pair. All right. I got a streetwear icon of my own. And, you know, you should be panicked about that. I'm backing the brand.

But I've also bought, I bought those Hoka's. Hoka's are one of the big success stories in sneakers. We've talked about that before. That's owned by Decker Outdoor, who also makes Uggs. There's another shoe called On. Both Hoka and On have those kind of marshmallow-y soles. And they became popular with performance athletes, and now they're worn by more marshmallow-y people

who don't do so much of the performance sports. I wear my Hoka sometimes through the Diamond District of Midtown Manhattan because that separates Grand Central's 47th Street exit from the News Corp headquarters where Barron's resides, and that two-block walk, if you can believe it, passes a Hoka store. It's the first U.S. flagship store for Hoka. I know, Jackson, you're thinking that doesn't sound very athletic, but have you been through

the Diamond District? It's the cigarette smokiest place in America. Smoking is in decline everywhere except there. And you've really got to be fast on your feet if you want to catch a clean breath. You've got to take a deep breath on Fifth Avenue and then just run like the wind until sixth. And I still get the people saying to me, shopping, sir, buying, selling, even though. Selling. Is that what it is?

Do I look like a guy who's in desperate need of a quick sale? I might need to rethink my fashion. Yeah, they have these thrift stores in LA where you can also sell your old stuff. Is that what it is? Do I look like a guy who's in desperate need of a quick sale? I might need to rethink my fashion. Yeah, they have these thrift stores in LA where you can also sell your old stuff. And every time I go there, I bring a bag of my clothes and they look through them one by one and they reject them all. Probably because they're too expensive looking, right? They're probably saying, we can never turn this stuff around. Back to Nike.

As I wrote in Barron's Magazine, Nike has stepped in something and it stinks. There were decades of stellar sales and stock performance, but the company has slipped into decline. Its shares peaked above $175 just over three years ago. Recently, they've collapsed to about $77. You can talk about brand heat. It's a difficult thing to measure, but because of sneakerhead culture, there's been this rise of secondary pricing data from trading websites. UBS collected some of that and they said Nike's second derivative deterioration is a negative.

Why are they bringing calculus into this? They love doing that. I'm not going to do a whole thing. Second derivative is like the rate of change of a rate of change. It just means that things are going from bad to worse. The downturn is picking up speed, right? Secondary prices across all Nike branded products, they fell 8% in November and that compared with a 4% decline in October. And for Nike's Jordan brand, the results were even worse. Now, the company is under new leadership. Longtime executive Elliot Hill returned as CEO in October.

And the company recently had an earnings call. And Hill said, my singular focus is to help us get back on track to get back to winning. And he talked about conversations with retailers and a realignment towards sports and a new model pipeline. But he also said that sales were down 8% and profit was down 24%. And analysts were mixed. One at BMO Capital said that Nike is in the midst of a return to what made it special,

including, quote, compelling storytelling. But the analyst at Jefferies sees, quote, lots of wood to chop. And he says the market share is, quote, getting Pac-Man'd away. It's hard to say what part of this has to do with Nike and what part has to do with the success of other brands. We should talk about Skechers. I can't remember if we've spoken about them on this podcast before. I wrote a column five years ago titled Skechers are cool

and the stock compares well with Nike. I didn't actually own Skechers at the time. There's been a stock market boom since then. It's driven by semiconductors and artificial intelligence and not shoes. So Skechers is up 66% since that column. It has lagged the S&P 500 index, but it has outpaced Nike by 82 points. I don't know how fully I believe the part about Skechers being cool, but I did buy a pair. Jackson, you've seen Skechers, right? Oh, yeah. My boy has this pair called Go Walk.

Skechers Go Walk. I think that's the name of them. And they slip on. They're like sneaker loafers. They slip on. There's no, there are laces, but they're just already tied. They look laced up all the time, but they pull right on. You don't have to lace them.

And I looked at them and I said, you know, let me give it a shot. And I ordered the same thing. Turns out they got them in a size 14 and I ordered them up and it was less than a hundred bucks. I think they were on sale. It might've been 50 or 60 bucks on sale. I can't recall. And I've slipped them on and I feel like a sucker for lacing up sneakers all these years

because it's the easiest thing in the world to pull on these Skechers. And then I started trying to figure out whether they had gotten cool. And I tested this on some, uh, I'm going to say some Gen Zers at the office. And I said, first, you know, you know you know our pal andrew berry right oh yeah i said to andrew just as a test i said first i had to get him into the conversation i said andrew what do you think is the third largest sneaker brand worldwide behind nike and adidas figuring i'd stump him on this he was probably sketchers i said yeah that's right sketchers i go i think they're becoming kind of cool he goes goes, eh. He wasn't.

I won't tell you exactly what he said, but he wasn't buying it. And so I turned to some Gen Zers who were near us. I go, no, no. I think with young people, they're getting into Skechers. And the Gen Zers weren't having it. So I went to someone even younger. I said to my daughter at home, are Skechers cool? And she said, no.

Although for you is what she said. So I guess that's where we're at. But the issue is that they're easily my favorite sneaker right now. When I have to go out there, I, there's this internal conflict where I think to myself, who are the people that I'm likely to run into and how brand conscious are they? Do I have to be wearing my Hoka's or new balances, or can I be wearing my Skechers? And in the near time, it's about choosing the right sneakers to match the people. But my long-term plan is just to replace my friends with people who will accept me for my Skechers because I don't want to lace up shoes anymore.

I don't care what shoes you wear. Thank you. The point here is that Skechers is really cleaning up in casual wear. And in performance running shoes, Hoka and Ahn are doing very well. Those stocks are doing much better than either Skechers or Nike. Since I wrote that column five years ago, Decker Outdoor is up 116% and Ahn Holdings up 81%. And I don't really know what's going on with New Balance. They're not publicly traded.

This trade publication that I read, they said that they're doing collaborations with flourishing niche clothing brands. There's one that's called A Bathing Ape. I think it's called, some people call it Bape or A Bathing Ape. And they've got, you know, they make the clothes and New Balance has the shoes to go with them. I don't really know. Oh, I've seen Bape. Bape. Okay. And there are endorsements. There's the pro basketball star Kawhi Leonard and the college recruit Cooper Flagg. That's that, that's that kid from Maine. He's like six, eight, and he's just a phenom. He's playing his first year at Duke this year. Apparently people think he had more to do than me with making New Balance cool. Okay. So the rise of these brands,

or the resurgence in the case of New Balance, that coincided with a choice by Nike to shift its sales efforts toward its own retail channels, its own wet commerce site, rather than its store partners. And the result there has not been good. There's been lasting damage to its wholesale relationships and to its shelf space. In other words, stores are saying, that's fine, Nike, we'll just have more space for Hoka and on. And that wouldn't be so bad if Nike's direct sales were booming, but they have been dismal too. The company has been using discounting to clear inventory. Advertising can help, and Nike has a history of incredible advertising. What's his famous tagline, Jackson? Just do it. You know where that comes from? No.

Well, the line is more inspirational than the origin, I'll tell you that for starters. It started saying just do it in the 1980s. The ad executive behind that phrase later said that it was inspired by the last words a decade before of a Utah murderer who was facing a firing squad. That's bleak. Don't make me laugh. I'm never going to think about that catchphrase in any other way. I'm sorry. I'm sorry for you. I'm sorry for ruining that and uh you know

i think he said let's do it and then they changed it to just do it i don't know i mean he was a murderer so you know but you still shouldn't be laughing it's a shame on you all right so what new advertising does nike have up its sleeve well it had a campaign over the summer called winning isn't for everyone, which is kind of like, you know, just do it as like, Hey, it doesn't matter who you are. You could do it out there. You know, the, the middle-aged guy who's trying to get back in shape and you're going out for that first run, just do it.

But winning isn't for everyone. It's like, Hey fatty, what'd you hang it up? Put those Nikes in the trash. You're ruining our brand image. But then there's this, there's a commercial titled, am I a bad person? And that featured Willem Dafoe.

And it was his most maniacal voice work since the green Goblin. He said, I have no empathy. I don't respect you. I'm never satisfied. I have an obsession. He's kind of half growling and half cackling. And then later he says, I want to take what's yours and never give it back. What's mine is mine. And what's yours is mine. And I thought, I hope he's not talking about my Skechers. There have been other tactical missteps for Nike. One, according to Randall Koenig, who covers the stock for Jeffries, is

to lean too heavily for growth on three styles called the Air Jordan 1, the Dunk, and the Air Force 1. Those are lifestyle shoes. And so by tilting the business too far in that direction, Nike opened itself to more competition from the lifestyle heavyweight Adidas. In doing so, it also neglected the performance side of its business, which opened the door to Hoka and Ahn. There are other concerns. Shoppers in China are shifting to local brands, and Nike needs the kind of turnaround that probably entails switching from cost-cutting to investing. But the backdrop for this is a stock

that although it's down a lot, it's not obviously cheap. It sold recently for 29 times projected earnings for its fiscal year ending this coming May. So that is Nike. And I don't know about just do it, maybe just do nothing until the new CEO can string together a couple of better quarters. And Jackson, sneakers come in boxes.

So I think that I've tied these two topics together. I think we'll call this the box episode. What do you think? I got to check and see if the paper podcast guys have used that. Thank you all for listening. Jackson Cantrell is our producer. Let's put out a call for questions. For one thing, if you have a question you'd like answered on the podcast, you can tape

it on your phone. Use the voice memo app. Send it to jack.how. That's H-O-U-G-H at barons.com. And let's give one more week for those Schrodinger's cat explanations. If you don't know what I mean, that makes two of us. You can refer to the episode we did on quantum computing, where I tried and failed to explain something called Schrodinger's cat and

how it related to quantum computing. And I put out a solicitation for 30 second, easy explanations from listeners, and we've gotten a bunch. So let's collect them for another week and I'll play them on some future episode. See you next week.