FTSE 100 business Informa (LSE: INF) has suffered virtually more than any other blue-chip business in the pandemic. However, despite its problems, the market is currently placing a high value on the shares. But I don’t think the business is worth this premium valuation.
A FTSE 100 stock to avoid
Informa is one of the world’s largest events businesses. It also provides business intelligence services. 2019 was a bumper year for the group. Sales hit an all-time high of nearly £3bn and net income rose to £225m.
Unfortunately, the music stopped in 2020. The global pandemic forced event organisers to cancel their plans virtually overnight. As a result, sales at the FTSE 100 business fell off a cliff. City analysts reckon the company will report a 50% decline in revenues for its 2020 financial year.
Based on these projections, shares in the group are currently changing hands at a forward price-to-earnings (P/E) multiple of more than 50. I think that’s far too high. Investors seem to be very optimistic that Informa will be allowed to restart its events next year and earnings will quickly recover. In my opinion, this valuation leaves no room for error if the business isn’t able to meet these expectations.
As such, I think the risk/reward ratio of owning the stock at current levels isn’t appealing. That’s why I’d avoid this FTSE 100 stock right now.
At the other end of the spectrum, I think the outlook for paper and packaging producer Smurfit Kappa (LSE: SKG) is highly encouraging.
The e-commerce market is booming. Online retail sales as a percentage of overall sales have jumped to around 36%, from 20% before the pandemic. All of these items need to be packaged. Smurfit is one of the largest providers of this packaging in the world.
Over the past decade, the FTSE 100 group has bulked up with a series of acquisitions. These deals have helped the company achieve economies of scale, pushing down costs and increasing profit margins.
The group also has a competitive advantage because it owns its own forestry and recycling operations. This helped the firm navigate the pandemic’s impact on its supply chain.
City analysts are forecasting €563m of net income for the group for 2020. That’s compared to €476m for 2019. I think that shows how the booming e-commerce market has been a boon for the business over the past 12 months. Earnings are projected to increase further to €640m for 2021.
These growth estimates are exciting, and I think they pale compared to Informa’s mixed and uncertain future. Based on its growth potential, I believe Smurfit deserves a higher valuation than Informa. That’s not the case. Shares in the packing company are trading at a forward 2021 P/E of 16.4. That seems far too cheap to me. What’s more, the FTSE 100 business offers a dividend yield of 3.1%, at the time of writing.
The post 1 FTSE 100 stock I’d buy today and 1 I’d avoid appeared first on The Motley Fool UK.
Rupert Hargreaves 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.
Motley Fool UK 2021