An investor looking for growth would do well to consider Mondi (LSE: MNDI), the packaging and paper products provider, I believe. If the shares of this FTSE 100 company had been bought at their lowest price five years ago, the capital would have risen around 125% by now, or around 25% increase every year.
But can the share price continue to reward investors in the future as well? I believe so, especially over the long term. In the next few months it could fluctuate for a variety of reasons, including profit taking and overall economic uncertainties. But I’m convinced the trend for the stock remains firmly upwards.
Spreading the risks
Globalisation might have fallen out of fashion, but it’s still great for big business, because it allows for a spreading of risks. In Mondi’s case, this spread is seen in both its revenue stream and production.
Its revenues are distributed across both geographies and products. In terms of geographic markets, the largest chunk comes from Western Europe. But I like that this is still less than 40% of the total. The remainder comes from all over the world, including the rest of Europe, North America and South Africa.
In terms of products, fibre packaging accounts for over half the company’s revenues, followed by consumer packaging and fine paper. While this diversification isn’t quite enough to negate the potential revenue hit to any one stream, I think it can soften the blow.
As far as production goes, the bulk of it takes place in Europe, but it is spread across other geographies as well, reducing risks from potential production disruptions in any one country.
This company is also insulated from business cycle slowdowns. I recently wrote about another FTSE 100 company in the sector, Smurfit Kappa, which I see as similarly well positioned to ride through economic rough weather because of relatively stable demand. This is is an important quality with Brexit looming and also because global growth is expected to soften somewhat in 2019 compared to last year.
Steadily improving financials
The firm’s financial performance is also a highlight. In its trading update for the third quarter of 2018, Mondi reported 30% growth in earnings before interest, tax, depreciation and amortisation (EBITDA), following an already strong EBITDA increase for the first half of the year. The fact that the company has been able to increase income levels year after year gives me further faith in its potential.
The only note of caution in this otherwise happy story is that the price has risen quite a bit since December. I think a long-term investor would benefit from buying the shares, since Mondi’s trailing earnings ratio is still at an affordable 11.7x, but waiting for the next market dip might not be a bad idea to get more bang for your buck.
