A paper and packaging company may not seem worth a second look in an era when hot technology names such as
streak skyward and growth stocks trounce value. But
stock shows potential.
Smurfit WestRock is set to begin trading in New York on July 8 as a paper powerhouse worth more than $20 billion, the creation of Ireland’s Smurfit Kappa buying U.S.
for $11.15 billion in a merger announced last September.
revealed Thursday that the deal has cleared all regulatory hurdles, with the company’s delisting from Dublin and London set for the first week of July, before shares in the new company are issued to both Smurfit and WestRock investors.
The combined company is well positioned to succeed. There may be even more reason to examine Smurfit Kappa stock ahead of the merger.
For one, the completion of the merger makes Smurfit a shoo-in for the
since WestRock is already a component of the index. Inclusion in the benchmark tends to be a boon for companies because many funds buy exposure to the index and therefore automatically take positions in the underlying stocks.
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Smurfit shares have already benefited from this realization, with the stock gaining more than 5% following news that the new company would be immediately integrated into S&P Dow Jones Indices.
But the S&P 500 is only a small part of the puzzle when it comes to attracting new investors. Smurfit is following what is now a relatively well-worn path of European companies listing in New York or moving their listings—especially from London—to the other side of the pond.
This trend is bad news for London’s stock market, but typically good for the companies themselves. New York has the world’s largest and deepest capital markets, and companies tend to attract higher valuations from American investors.
and
have all benefited from shifting European listings to New York or going public on Wall Street.
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For example, Smurfit’s London-listed stock trades at 11 times price to earnings for the year ahead. WestRock’s price-to-earnings ratio is above 15 times.
The fundamentals are also positive, including expectations that the merger will deliver at least $400 million of pre-tax synergies within the first year. Smurfit is already Europe’s largest paper and packaging group with strong exposure to fast-moving consumer goods, and the combined company will expand its reach while bringing annual adjusted earnings to around $5.5 billion.
“The combination with U.S.-player WestRock will establish a geographically diverse, global leader in sustainable packaging,” Deutsche Bank analyst Kevin Fogarty wrote in a May note, initiating coverage of the company. Forgarty rates Smurfit Kappa at Buy with a price target on the London-listed stock of £42 ($53), which is in line with the average of eight estimates collected by FactSet. The shares closed Thursday at £35.46, implying upside of more than 18%.
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While investors initially frowned on the deal in 2023, sending Smurfit shares tumbling some 15% in the days after the merger was announced, the market backdrop has since improved.
Last year was tough for paper and packaging as companies worked through bloated Covid-era inventories. Demand has improved faster than expected, however. Helped by strong pricing in commodities markets, Smurfit stock has gained almost 30% since that selloff last September. WestRock is up more than 50% over the same period.
“Improving industry volume and pricing dynamics would also positively impact share price performance,” Fogarty wrote.
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The team at Deutsche Bank, for their part, think that can continue, though there remain risks, including a deterioration in the macro backdrop, excess industry capacity, deflationary pricing pressures, and integration risks from the merger, as Fogarty noted.
But the bull thesis is definitely worth unpacking.
Write to Jack Denton at editors@barrons.com
