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Should I buy Smurfit Kappa’s shares after today’s 25% earnings surge?

Always keep an eye on the quiet ones, that’s my motto. Paper-based packaging specialist Smurfit Kappa Group (LSE: SKG) isn’t a household name but it’s still a £5.5bn FTSE 100 business that has grown 82% over the past five years, against just 12% for the index as a whole. Should you consider popping it into your Stocks and Shares ISA? The answer is a quiet yes, I believe.

Smart package

The stock is up around 1.5% today after the group posted a 25% rise in first quarter EBITDA earnings to €424m, largely due to higher corrugated pricing and demand growth, while revenues grew 7% to €2.3bn.

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Management praised “a very strong first quarter performance” and frankly, it needed it, because the share price has crashed 25% over the past 12 months. The withdrawal of Memphis-based International Paper’s takeover bid, concerns over a crackdown on paper packaging and fears of overcapacity all played a part in that. Some have also been worried by rising net debt, used to fuel an acquisition spree. Smurfit also took a €1.3bn hit when exiting strife-torn Venezuela.

Today’s results reflected “higher corrugated pricing, demand growth, a relentless focus on cost efficiencies and the benefits of our capital programme”. The group, which operates across 35 countries and posted total revenues of €8.9bn in 2018, has been growing nicely in Europe, as well as Colombia, Mexico and the US, and is stretching its geographic reach to Bulgaria and Serbia through acquisitions.

Dividend growth

Smurfit Kappa is combating environmental concerns through its Better Planet Packaging initiative to develop more sustainable, biodegradable packaging, which should also help defend the business against its eco-critics.

Group CEO Tony Smurfit hailed “an excellent start to the year” and expressed his confidence in delivering another year of progress. The stock currently offers a forward yield of 4.4%, generously covered 2.9 times, which offers hope of future progression. The dividend has almost doubled from €0.55 to €0.98 per share over the last five years, which is a good sign. Royston Wild sees plenty to like, too. The wider concern is that a global slowdown could hit packaging demand.

Paper tigers

Fellow FTSE 100 member Mondi (LSE: MNDI) is also in the global paper and packaging business and has had a similar bumpy ride, its share price down 17% over the past year but up almost 75% over five. Like Smurfit, it is fully integrated, right down to managing forests, and is working hard to make packaging more sustainable.

The difference here is that net debt isn’t a worry. Mondi has a return on capital employed of 18%, which my colleague Roland Head shows that money spent on its recent expansion is delivering good value

Wrapped up

The dividend looks promising with a forecast yield of 4.1%, covered 2.4 times. Mondi has a 22.4% return on capital employed, which is solid. Recent share price slippage has reduced the valuation to just 10.1 times earnings, which is a tempting entry price.

That could make it marginally more attractive than Smurfit. Although I notice that City analysts expect earnings per share growth for both stocks to flatten over the next couple of years. Perhaps they’re worrying about that global slowdown too.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.