Novice Investing - International Paper's Hidden Asset

Date: Friday 29th 2008f August 2008 12:19:27 PM

International Paper's Hidden Asset - 04/04/2006

By: Novice Investing Staff

Balance sheet can be tricky. It can hide weaknesses as well as strength. One can boost short-term profit by temporarily building up inventories. Furthermore, management can boost return on equity by accumulating debt. This time, International Paper Co. (IP) reveals its hidden asset in the form of land.

On Tuesday, April 4th 2006, International Paper announced that it is selling 5.1 million acres of land for $ 6.1 Billion. Now, 5.1 million acres is a lot of land. But who would have thought it is going to worth that much? The next question is how can we identify such companies? This is not an easy question. A glance at International Paper's balance sheet shows nothing extraordinary. As of December 31st 2005, property plant and equipment (which normally excludes land) was at $ 13.991 Billion. Meanwhile, goodwill stood at $ 5.04 Billion. The only columns left under long term asset is long term investment and deferred long term asset charges. Both stood at less than $ 2.4 Billion. Thus, it is a surprise that International Paper is selling the land for $ 6.1 Billion.

Talking is cheap. But if you can find such hidden asset, you have found your gold treasure. One recent example was K-mart's real estate asset which was not considered at all during its bankruptcy. The stock has since risen 5 folds from its post-bankruptcy trade.

With $ 6.1 Billion more on hand, has International Paper depleted its land assets? No! Reuters reported that the company still intends to sell another 300,000 acres of land in New York. Meanwhile, it will keep a 830,000 acres of land in Southern United States. This 1.1 million acres of land is worth probably around $ 1.5 Billion in cash. Therefore, International Paper has actually $ 7.6 Billion in hidden assets from its land! This is about 43% of its market capitalization. Now, we have not talked about other assets owned by International Paper such as its plant, distribution channel and brand name. But apparently, you can't see all from just reading the balance sheet.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding International Paper Co. (IP) or any other securities.

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