Thinking inside the box can sometimes pay off. For businesses in the cardboard packaging sector, the current war on plastic is a welcome trend – and could set stocks in this ailing sector up for a rebound.
It’s taken a lot of patience to get here, though. Many of the companies involved in the pulping, processing and manufacturing of paper and cardboard have suffered as print media sales have declined (paper sales account for roughly 30% of Finnish forestry company Stora Enso’s [STERV] revenue today, for example, compared to 70% in 2006), while concerns over deforestation have given investors reason to put their money elsewhere.
Fast forward to today, and as well as emphasising their commitments to a sustainable, plastic-free future, the advent of e-commerce has also provided a lifeline. With e-commerce sales in the UK alone expected to reach $137.08bn in 2019 (up 11% on 2018 figures), demand for cardboard boxes isn’t going anywhere.
Expected e-commerce sales in the UK in 2019
Analysts are becoming increasingly bullish on companies in this sector, with Exane BNP Paribas advising that there is plenty of room for packaging demand to increase in the second half of the year in July. Meanwhile, packaging company stocks remain relatively cheap as they recover from years of lackluster performance – here are four to watch.
Paper and packaging company Mondi [MNDI] has seen its share price fall 21% since its all-time-high of 2,250p last August, settling at 1,774.00p as of Friday’s close.
But despite this poor recent performance, the bigger picture looks good for Mondi. Overall for the year-to-date, the Austrian firm’s stock is up 8.4%. First quarter results have also been positive, driven by, according to Mondi, “higher average selling prices, a strong operational performance, the contribution from acquisitions and expansionary capital expenditure projects completed in 2018, and lower planned maintenance shut costs.” Underlying EBITDA for Q1 was up 16% year-on-year at €471m, and the company expects to hit its end-of-year targets.
Meanwhile, Mondi has also said it will invest up to €800m into bolstering production capabilities.
With this in mind, and alongside a P/E ratio (TTM) of 11.61 compared to the industry’s 12.96, Mondi stock may currently be undervalued.
Analysts are expecting more growth on the horizon, with consensus estimates for FY 2019 sales to surpass €7.7bn, a 3% increase on 2018’s results.
|PE ratio (TTM)||11.19|
|Quarterly Revenue Growth (YoY)||6.80%|
Mondi share price vitals, Yahoo Finance, 16 July 2019
After reporting 25% year-on-year EBITDA growth in its Q1 2019 results on 3 May, the Irish packaging company’s share price surged 1.5% throughout the day – a positive sign for investors, who had to that point seen the company’s share fall by 16.6% year-on-year.
Indeed, the past 12 months have been eventful for Smurfit Kappa [SKG], which was forced to exit its business in Venezuela at a cost of €1.3bn after a manufacturing plant was seized by government officials. A disruptive takeover bid from International Paper (which eventually fell through) has also proved a distraction.
On Friday, its share price closed at 2,610p, with a subdued P/E ratio of 10.07 compared to the industry’s 12.96. Consensus recommendation for the stock is currently “buy”, with sales expected to increase 4.48% in the next year.
“We think investors do not fully appreciate how SKG’s medium-term investment plan can improve its business resilience,” Exane BNP Paribas analysts said on 9 July, as they upgraded their position on Smurfit to “outperform” from “neutral”.
|PE ratio (TTM)||10.02|
|Quarterly Revenue Growth (YoY)||2.30%|
Smurfit Kappa share price vitals, Yahoo Finance, 16 July 2019
As shares in US corrugated packaging firm WestRock [WRK] have continued to hover around $36, 49% below 22 January’s all-time high of $70.27, analysts are suggesting now could be a time to buy.
Simply Wall Street reports that “earnings over the next few years are expected to increase by 40%, indicating a highly optimistic future ahead”, while analysts are expecting a quarterly EPS of between $0.98-$1.09 when it next announces results on 1 August, up from its current $0.80 per share (which, in turn, was a result that exceeded the Zack’s consensus estimate high of $0.63 at the time).
WestRock’s share price has given plenty of reason to scare investors off in recent months, though, with a number of sharp falls recorded in the year-to-date. As of Friday’s close, the share price is sitting at $36.95 (down 1.1% for the year), with a below-industry-average P/E ratio of 11.33. With analysts expecting healthy growth in future – price targets of $49.23 suggest a potential 33% upside – the stock may be undervalued at present.
|PE ratio (TTM)||10.99|
|Quarterly Revenue Growth (YoY)||15.00%|
WestRock share price vitals, Yahoo Finance, 16 July 2019
Writing in The Telegraph in January, AJ Bell investment director Russ Mould said he sees UK packaging giant DS Smith [SMDS] as “a potentially undervalued income generator”.
The company’s most recent set of results appear to support that theory: on 13 June, DS Smith announced estimates-beating pre-tax profits of £350m (up 35% year-on-year). Following the good news, DS Smith’s share price closed up 4% that day at 360.8p. It closed last week at 367p, up 23% in the year-to-date.
Growth isn’t expected to stop there. Announcing the results, DS Smith’s CEO Miles Roberts had a message for those holding short positions on the stock (around 4% at the time). “All we can do is help people understand that fundamentals of our business: e-commerce, the sustainability agenda, the changing face of retail,” he said. “These results are an opportunity to show that we are exactly where we are expecting to be.”
Analysts have responded with bullish estimates on DS Smith’s prospects, with EPS expected to increase as much as 57% from 19.7p to 30.9p over the next three years. Refinitiv data shows that the consensus recommendation for DS Smith is currently “outperform”.
|PE ratio (TTM)||17.90|
|Quarterly Revenue Growth (YoY)||8.50%|
DS Smith share price vitals, Yahoo Finance, 16 July 2019