Last week was a poor one for FTSE 100 company Smurfit Kappa Group (LSE: SKG), the share price falling to 1,951p before recovering slightly by Friday’s close, then dipping again early on Monday. It is 31% down on its average trading price for the year and that is more than the fall seen in the FTSE 100 index as a whole.
Is it time to panic? After all, if other investors are dumping the stock, maybe it is an indication of bad times to come for the company, right? Wrong, I say.
It’s a sale!
Despite its poor performance at the stock exchange in recent months, the paper-based packaging provider still remains a quality purchase. I like to think of Smurfit Kappa’s deeply discounted price as a great product available at an end-of-season sale discount. I think there is limited meaning to be read into the price crash, at least with the information currently available.
I can’t emphasise enough what a great time the current market downturn is to invest in fundamentally sound companies. Some examples of such companies I have written about in the past are consumer goods major Unilever, which is a great defensive play and British luxury Brand, Burberry, given its financial health and growth prospects.
Strength in numbers
Similarly, there are at least two big reasons why I think Smurfit Kappa continues to remain an attractive company to invest in. First, its financials. In its last trading update, the company reported increases in both revenues and earnings, adding to the company’s overall financial health. Further, for the 2018 year, the company expects a “materially better outcome” than the previous year. Analysts agree with the company’s management, with a largely unequivocal ‘buy’ rating on the company.
In other words, Smurfit Kappa is a good growth stock.
Expansion drive hedges risks
Second, Smurfit Kappa is on a major expansion path. In 2018 alone, it has made three acquisitions, expanding its geographical footprint to France and Eastern Europe. The company’s revenues are already widely distributed geographically, and the latest acquisitions should reduce its exposure to the economic climate in a particular country further.
Is there any downside to all this? I am uncomfortable about there being little information on how the expansion is being funded. It is likely that the company is taking on debt, but this need not necessarily be a cause of concern. Confidence can be gained from the fact that Smurfit Kappa has had an eye on sustainability in the past, by keeping debt levels in check. In 2017, it reduced its absolute net debt by from €2,805m from €2,941m in 2016.
Short-term pressures, long-term buy
Some doubts about whether margins can be maintained have also arisen on expectations of a softer price environment coupled with rising cost pressures, but these still need to play out and might be relatively short-term in nature. Overall, I feel the company has more going for it than not and I see it as a good investment for a long-term portfolio.