October has been quite a strong month for the FTSE 100, with the UK’s flagship index reaching a new record high. But sadly, not all of its constituents have been so fortunate.
Mondi (LSE:MNDI) is one such business that saw its stock price suffer a painful 21.3% crash in just a few days last month following a concerning profit warning.
This continues the downward trajectory Mondi shares have been stuck on since early 2022. But with a forward price-to-earnings ratio of just 8.9 and an impressive 7.1% dividend yield on offer, has all this volatility created a lucrative buying opportunity?
What’s going on?
As a quick reminder, Mondi is a leading global supplier of sustainable packaging and paper solutions. It’s hardly the most exciting business out there. But with the rise of e-commerce and businesses moving away from plastic packaging, it plays an increasingly critical role within the value chain of countless corporations.
The problem is, demand for packaging is actually struggling at the moment. Large corrugated cardboard stockpiles are handicapping order volumes. And with paper packaging similarly experiencing oversupply, prices have been shifting downward.
The result? In its third-quarter trading update last month, Mondi warned investors that earnings were falling short of expectations. Management cut full-year guidance. And unsurprisingly, shareholders didn’t take the news well, resulting in a 16% single-day crash that expanded to 21.3% within a week.
Today, the shares are still down around 19% since before this profit warning. But is there hope for a comeback?
Bulls versus bears
The fact that the group’s forward P/E ratio is now around nine, even after a downward revision in profits, suggests that investors might have gone a bit overboard on the selling front. Even more so, considering the problems Mondi is facing appear to be cyclical rather than structural.
This isn’t the first time the company has had to navigate through a soft market environment. And when looking out to the long term, demand from sectors like e-commerce remains resilient, especially for sustainable packaging.
At the same time, its balance sheet remains strong. It does have a significant £2.8bn pile of debts & equivalents versus only £168m in cash reserves. However, with a low production cost basis, it remains a highly cash-generative business with more than enough financial flexibility to cover interest expenses and the impressive dividend.
That certainly sounds like a buying opportunity has emerged. But of course, there are some key risks to consider.
Mondi is highly exposed to the European industrial manufacturing sector. Regional economic stagnation and structural shifts in supply chains toward leaner just-in-time inventory models ultimately reduce the need for bulk packaging materials. While that’s unlikely to significantly reduce long-term demand, it could apply more pressure to Mondi’s pricing power.
The bottom line
Mondi’s management isn’t blind to the shifting landscape within the European industrial sector. In fact, this is one of the leading reasons why it’s ramping up its e-commerce-focused packaging solutions.
In my opinion, this prudent diversification strategy will ultimately offset the expected decline within its currently core manufacturing customer base. But there’s an element of execution risk as well as uncertainty surrounding the timeline of this transition.
Nevertheless, with investors seemingly being overly pessimistic about this enterprise, I think the FTSE 100 stock is worth a closer look.
