UBS Warburg's Smurfit prognosis still rose-tinted

UBS Warburg's packaging analyst Rich Schneider has always been a bit of a bull about Jefferson Smurfit, and his latest pronouncements after Smurfit's interim figures last week do not depart from his rose-tinted assessment of the group's prospects.

Schneider labelled Smurfit as a strong buy and put a 12-month price target of $28 on the Nasdaq-listed ADSs. Those same shares are currently trading at just over $22, so if the UBS pundit is calling the market for Smurfit right then the shares are obviously worth a flutter.

But Smurfit shares have flattered to deceive for so long that anybody taking a punt on the shares should be very careful. The Irish Times described those interim figures as "pedestrian" and that, if anything, is an understatement. And even though there has been heavy two-way trading in Smurfit both before and after the first-half figures, it did not move the share ahead.

At €2.45, the shares might be at their best level this year and well above the €1.80 low but they are still trading at 14 times the 2001 earnings (P/E) forecast from Joe Burnell, the Smurfit analyst with the company's Irish broker, Davy.

That 2001 multiple might be well below the staggering prospective earnings multiples at which the American paper sector is trading (Smurfit's SSCC associate in on forward P/E of 66!), but Smurfit is trading on a far higher rating than any European company, with the exception of Stora Enso.

Is that premium to the European sector justified?

One feature of the UBS report on Smurfit that has caused some confusion is Rich Schneider's suggestion that Irish institutions, after aggressively selling the stock since the mid-1990s, are now returning as buyers. In the mid-1990s, the Irish institutional holding in Smurfit was as high as 60 per cent.

But that has now fallen to around 20 per cent as a general negative attitude to Smurfit and post-euro asset reallocation saw Irish fund managers move their Smurfit investment elsewhere.

"There are now signs that these institutions could even return to buying the stock," commented Mr Schneider. Since he made those comments, Current Account has spoken to a number of Irish fund managers and none of them admitted to suddenly being converted to a buyer of Smurfit shares.

The appetite for Smurfit stock will remain largely American institutional, a sector that seems to take a more benign attitude to Smurfit's horrendous underperformance and the dismissive attitude of Michael Smurfit to legitimate shareholder anger at his grossly disproportionate salary package.

Smurfit is rightly labelled as a cyclical stock - one that does well in economic upswings and suffers in the downswing when manufacturers need fewer of the cardboard boxes manufactured. With little sign of upswings in any of the major economies where Smurfit operates, the case for buying these shares is simply not there.