With demand growth likely to keep sprinting past supply expansion for some time yet, I am convinced Smurfit Kappa Group (LSE: SKG) should remain a lucrative share selection in the years to come.
My positive view is reinforced by City forecasts, but I will come onto that more in the next few minutes. Right now I want to look at another London-quoted stock with quite-terrific profits potential: CML Microsystems (LSE: CML).
Mighty Microsystems
The Maldon-based company — which designs, manufactures and markets mixed-signal and radio frequency semiconductors — was last dealing 10% higher in Monday trading following the release of a brief-but-bubbly first-half trading statement.
It declared that trading between April and September was in line with expectations and “gross revenue and draft operating results are in line with expectations and significantly ahead of the prior year corresponding period.”
Those hoping for an immediate earnings spring are likely to be disappointed — the bottom line is anticipated to fall 5% in the 12 months ending March 2018. However, the business is predicted to bounce back with an 8% advance in fiscal 2019.
CML Microsystems has thrown vast amounts at improving its sales, marketing and R&D operations across the globe in recent periods, measures that have allowed it to diversify its customer base and bolster its product ranges. And as a consequence the tech titan has seen orders swell.
A forward P/E ratio of 21.3 times may be slightly toppy on paper (this perches above the widely-regarded value benchmark of 15 times), although this may still represent attractive value to many investors given the firm’s strong sales momentum.
Cardboard colossus
Looking back at Smurfit Kappa, the City is also expecting earnings to trek lower in the more immediate future. A 7% decline is currently anticipated for 2017.
But on the plus side, this forecast only leaves the packaging ace dealing on a prospective earnings multiple of 12.6 times. And with profits expected to start rising sharply again from next year (a 16% advance is predicted for 2018), I reckon this represents a decent level at which to latch onto the packaging ace.
The Dublin-headquartered business is under the cosh a little right now due to the impact of “continued and unprecedented recovered fibre cost inflation.” Indeed, while revenues rose 5% during January-June, to €4.23bn, this could not prevent EBITDA sinking 4% to €569m as said cost inflation grew by some €75m year-on-year.
However, Smurfit Kappa is taking steps to pass on these costs to its customers, and this is expected to continue as the business moves into 2018.
As the FTSE 100 noted in the first half, “global containerboard supply has been very tight” and the company is well served to meet the demand of clients around the world thanks to its integrated business model.
Furthermore, the Footsie firm’s leading market position in both Europe and the Americas (Smurfit Kappa operates out of 21 countries on the continent and more than a dozen in the Americas) provides a base with which to deliver stunning sales growth. I reckon the paper tiger remains a sound pick for long-term investors unafraid of a little near-term turmoil.
