Smurfit Kappa – More Adjustment in 2012 Should Result in Stock Rise

Vertical Research Partners have recommended Smurfit Kappa Group (SKG) shares as a ‘buy’ with a €11 target. SKG is trading at historically low levels but it’s believed that The Street still needs to adjust 2012 estimates down to more realistic levels. Long term however, the stock is likely to outperform the market significantly.

SKG is strong in terms of profit and its valuation is relatively cheap. Couple this with its current focus on getting its finances straight, and it seems like it could be a good investment, with stock hitting €11 in the next 12-18 months.

In Europe, containerboard prices have dropped by more than 10% just recently and there is much evidence to suggest that some of the European Union is already in a recession. More than 80% of revenue is linked to Europe, and therefore it’s believed the stock will be subdued for the next few quarters by continued downward estimate revisions. Once the economic uncertainty in this region subsides, demand will continue and SKG's valuation is likely to increase to the level of other similar companies, which will give a significant upside to the stock.

SKG also has a presence in Latin America  - approx 17% of its business. Margins in this region have been much healthier throughout and it’s thought that this will continue and drive long-term growth for them.

As with all investments, the trick is to buy low and sell high, which can demand a leap of faith, always bearing in mind that investments can go down as well as up.

Posted Date: 20th Dec 2011