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Cramer: International Paper ‘ludicrously’ cheap

(Click for video linked to a searchable transcript of this Mad Money segment)

*This post was updated on September 17th. An earlier version incorrectly stated that Packaging Corp. acquired Boise Cascade when the company, in fact, acquired Boise Inc.

New developments involving a rival have Cramer convinced that International Paper is a screaming buy.

Specifically, Packaging Corp. of America said it would acquire the smaller Boise Inc for about $1.28 billion, a premium of 26% to Boise's Friday close.

Although most published reports focus on the way in which the deal is expected to increase Packaging Corp's container board capacity, Cramer thinks the bigger takeaway for investors is something entirely different.

"What I think really matters here is that this transaction takes out a bunch of additional capacity. That's a huge deal in this space," Cramer said, because it's not the only development reducing capacity.

"Last week, we learned that International Paper is shutting down its paper mill in Courtland, Alabama. And last month Georgia Pacific said it would close down parts of its mill in Crosset, Arkansas.

In a case of what's bad for Main Street being good for Wall Street, these closings will reduce supply, industry-wide. In turn, reduced supply should generate higher prices ultimately boosting the bottom line.

That's bullish for shareholders therefore Cramer says "I would have expected IP to rally on the Packaging Corp acquisition but it didn't. That's a mistake."

And although Cramer thinks the supply decrease is a significant catalyst for IP, it's hardly the only catalyst.

Adam Jeffery | CNBC

"Under the leadership of its fabulous chairman and CEO, John Faraci, International Paper has gone through a massive transformation," Cramer explained.

That is, since 2007 International Paper has divested itself of 7 million acres of forest land, something Cramer finds bullish. Also, he says, the company has shifted its focus from paper to industrial packaging, with the stronger packaging division now accounting for over half of their business. Cramer likes that too.

Cramer also thinks IP's overseas exposure makes it attractive.

"While 75% of the company's business is done in North America, the rest comes from fast-growing regions like Brazil, Russia, India, and China, as well as some parts of Europe."

On top of that, Cramer finds recent metrics impressive.

"When International Paper last reported, it delivered a magnificent 8-cent earnings beat off of a 56 cent basis, thanks to stronger than expected margins in printing papers, and a 30% year over year increase in the container board business."

In addition, Cramer cited a buyback.

"Just last week, International Paper announced a $1.5 billion buyback, equivalent to nearly 7% of the company's market cap—this is a meaningful buyback, one that could add more than 30-cents to International Paper's earnings per share."

Beyond that, Cramer thinks synergies that stem from IP's acquisition of Temple-Inland 2 years ago are starting to percolate.

However the piece de resistance has to be the valuations. Cramer thinks the stock is simply too cheap.

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"Right now the stock is trading at just 11 times next year's earnings estimates despite having a 15% long-term growth rate, which I think is ludicrously cheap. Beyond that, International Paper is also trading at about a 7% discount to the rest of the industry on an earnings before interest, taxes, depreciation and amortization basis, and I believe that's absurd considering that this company is best of breed. It should be trading at a premium to the other containerboard names, not a discount."

All told, Cramer sees every reason for International Paper to rally.

"The Boise Cascade takeover really makes me want to buy International Paper," Cramer said. "It's a titan in the industry with 34% market share and I believe it will be a huge beneficiary of the consolidation currently underway."

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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