Last year was a great time for FTSE 100 stocks associated with online shopping. From e-marketplaces to food delivery providers, and from warehousing stocks to packagers, everyone benefited. But now that the outlook has improved and the pandemic has receded, can they retain their performance?
I am looking at this question in the context of the packaging provider Mondi (LSE: MNDI). Mondi is among the biggest FTSE 100 losers today after its trading update. I can see two developments in the update that may have disappointed investors.
Why the Mondi share price is down
First, Mondi’s pre-tax earnings are down by 8% in the first quarter of 2021, from a year ago. The company says that this is in-line with expectations, but provides nothing else by way of explanation.
Second, like DS Smith and SmurfitKappaGroup last week, it flags rising paper costs. It also talks of rising energy costs, which was to be expected going by rising crude oil prices in 2021.
But are these enough reasons for a sustained drop in the Mondi share price?
#1. Positives in the update
I am not sure. Which is the first reason why I would like to buy this dip. While there is little denying that rising costs can really squeeze the margins if they get out of hand, right now we are not at that stage.
Further, the company’s earnings picture is not all bad either. While its pre-tax earnings have indeed dipped from the year before, they are still up 14% sequentially.
Its outlook is strong too. The company says that “We are seeing strong demand across our packaging markets, supported by the structural growth drivers of e-commerce and sustainability and are implementing price increases across all key product segments”.
#2. Competitively priced
At the same time, Mondi is not terribly overpriced like many other FTSE 100 stocks. Its price-to-earnings (P/E) ratio is at around 19 times. Covid hit stocks, like Lloyds Bank, on the other hand have an over 35 times ratio.
It can be argued that the ratio looks higher for Lloyds because its earnings have been impacted by the pandemic and over the course of 2021 it may actually decline. But on the other hand we have the likes of the less impacted utilities, with ratios at over 40 times. What explains them?
My point is, that no matter how I look at it, Mondi does look decently priced to me.
#3. Favourable structural drivers
And this is when its long-term story is intact. I think it is likely that growth will soften for online shopping driven companies in 2021, as they come out of a bumper year of 2020. But from a long-term perspective, the pivot to digital sales has happened, accelerated by the pandemic.
Mondi is a big company catering to the segment, which is poised to reap rewards from this trend.
The upshot for Mondi
So, even though it is seeing rising costs and narrowing profits, both the outlook for the stock and its current price go in its favour. Mondi is a buy for me.
