The trending stock making itself hard to ignore

It's hard to ignore a stock that keeps going up. I've written about FTSE 100 paper and packaging firm Mondi (LSE: MNDI) before over recent years but never appreciated the potential for the firm's shares to glide so gracefully up for so long in a two-o-clock direction.

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In 2008, Mondi changed hands around 121p. Today the shares trade at 1,605p. The momentum in the chart seems strong, so is it worth getting involved now?

Business still growing?

In an update today, Mondi reveals underlying operating profit for the third quarter up 3% compared to last year's equivalent period, but 12% down compared to the second quarter of 2016 because of lower average selling prices and a lower fair value gain on forestry assets. With a year-by-year perspective, that's still progress we could argue.

Meanwhile, cash generation from operating activities largely offset the cash outflows related to the firm's capital expenditure programme, acquisitions, and payment of the interim dividend. That said, net debt increased during the quarter to EUR1.56bn, which works out as around 1.7 times the level of last year's operating profit. That seems reasonable.

Overall, I don't think there's anything in this update to halt Mondi's robust share price momentum. Looking forward, the company expects to benefit from stable or higher selling prices in a number of its key products in 2017 after seeing downward pressure during 2016. The directors reckon costs remain generally stable, the firm's ongoing capital investment programme is delivering strong returns, and a clear strategy, robust business model and culture of continuous improvement make the top management team confident of continuing to deliver an industry leading performance.

My one reservation

Mondi talks the talk and the firm's share price and business walks the walk, it seems. City analysts following the firm have pencilled-in a 4% uplift in earnings for 2017. Not massive, but maybe enough to keep Mondi's shares on their current trajectory. After all, the firm looks attractive on valuation grounds with its forward price-to-earnings (P/E) ratio of around 13 and a forward dividend yield just over 3% with the payout covered almost 2.5 times by those growing earnings.

Everything looks fine and Mondi could continue to be a momentum winner. My one reservation is that the company's business must surely contain a sizeable element of cyclicality. If we see a slump in economic activity around the world I feel certain that the music will stop on Mondi's business and share price momentum. However, there's no sign of that happening now.

In fairness, the whole sector is doing well. Look at James Cropper (LSE: CRPR), for example. The FTSE AIM firm deals in forestry and paper products and shares that traded around 76p during 2009 now change hands at the 1,137p level. It's true that Cropper's valuation is a little more racy than Mondi's. The forward P/E rating runs at 20 for year to March 2018, but that's justified by City analysts' estimates of a 21% uplift in earnings that year.

Compounding returns

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.