I noticed that FTSE 100 incumbent Smurfit Kappa’s (LSE:SKG) shares have been on a downward trajectory for some time. Could this growth stock, trading at bargain levels, be a good choice for me to boost my holdings with a view to its eventual recovery?
Paper and packaging solutions
As an introduction, Smurfit Kappa is a leading paper and packaging solutions provider with a worldwide presence. It has over 355 production sites and operations in 35 countries throughout the world.
So what’s happening with Smurfit shares currently? Well, as I write, they’re trading for 2,440p. At this time last year, the stock was trading for 33% higher, at 3,684p. I believe macroeconomic headwinds and the tragic events in Ukraine have hampered the shares in recent months.
The investment case
Starting with the bear aspects of Smurfit, headwinds such as soaring inflation, the rising cost of materials, and volatility in the energy market are all playing a part in pushing down Smurfit shares. Rising costs is a credible threat as this means it costs more for Smurfit to manufacture and sell its products. A hike in prices could lead to its customers seeking alternatives. Profit margins are then put under pressure.
In addition to this, the current volatility in the energy sector, and a potential shortage of gas linked to the Ukraine war, led to Smurfit recently stating that a shortage of paper could become an issue. This could hinder performance and returns.
For the bull aspects of Smurfit, I’ll start with the current share price offering great value for money. On a price-to-earnings ratio of just nine, the shares look dirt-cheap. The FTSE 100 average is 15. For a global business with a long history of performance growth and returns, this looks attractive.
Next, Smurfit’s interim results for the half-year ended 30 June were positive. It reported that revenue increased by 36% compared to the same period last year. In addition to this, EBITDA grew by 50%, and it also increased its interim dividend by 8% to 31.6 cents per share. It seems to me the macroeconomic headwinds have not hampered it too much yet.
Finally, Smurfit shares would boost my passive income stream through dividends. At present, the dividend yield is an above index average of 4.35%. I am aware that dividends can be cancelled, however.
A FTSE 100 stock I like but will monitor
To summarise, Smurfit is at the mercy of current volatility. However, its most recent trading update does not show any ill-effects, in my opinion. It is a global business with enticing fundamentals, and great growth prospects linked to the e-commerce boom.
For now, I’ve decided that I want to see full-year results later in the year before I buy Smurfit shares. I will keep Smurfit on my watch list. I have a feeling that the second half of the year could present further challenges linked to recent headwinds. If it can overcome these successfully, which could be displayed in full-year results, I may change my stance.
