2 'under the radar' stocks offering growth and income

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Shares in Mondi (LSE: MNDI) took a hammering today following a profit warning from the multinational packaging and paper company.

Cost pressures

In a trading update for the three months to 30 September, the FTSE 100 firm said its underlying performance for the full year would likely fall "modestly below market expectations" because of continuing cost pressures and negative currency impacts.

Mondi said a weaker US dollar and a sharply weaker Turkish lira were the main drivers of the net negative currency impact on its third quarter operating profit. Cost inflation also contributed to a weaker than expected financial performance, as prices for its three key input commodities, wood, energy and chemicals were all higher than a year ago.

Like-for-like growth

On the upside, the firm is showing steady momentum in like-for-like sales, which had been driven by growing volumes and continued upward momentum in average selling prices. As such, underlying operating profit for the third quarter of 2017 climbed 8% higher than the same period last year, to EUR245m.

Moreover, free cash flow remains strong as cash generation from operating activities exceeded cash outflows for paying its capex, dividends and interest costs. This enabled the firm to reduce net debt during the quarter, and gives me confidence in the sustainability of its dividends going forward.

Dividends

Mondi's dividends are covered 2.4 times by earnings, and have grown by a compound annual growth rate of 16.6% over the past three years. And after today's 8% fall in its share price, you can pick up the stock on a yield of 2.6%, making it a tempting pick for dividend growth investors.

The shares are also attractively valued from a valuation standpoint, as Mondi trades at a lower multiple on earnings than its peers -- it has a trailing price-to-earnings ratio of 17, compared to the sector average of 19.4.

This could be a better buy

Rival Dublin-based packaging company Smurfit Kappa Group(LSE: SKG) is also worth a closer look for value-minded investors. Although shares in the company have gained 18% since the start of the year, the firm currently trades on a trailing price-to-earnings ratio of 14.8, with a forward P/E of just 11.4 on this year's expected earnings.

Although Smurfit Kappa faces similar headwinds to Mondi in terms of cost inflation, the company appears to me to be better placed on the margin front. In spite of these pressures, it has recently been able to grow its margins, due to increased price recovery from its customers and a reduction in its cost base.

Expansion strategy

And on top of organic growth, the company eyes an ambitious global expansion strategy. Although Smurfit Kappa has been quiet on the acquisition front this year, CFO Ken Bowles said the company has financial means to carry out a deal.

"We have enough to spend whatever we want. The size of the deal wouldn't necessarily be an inhibitor, it is about finding deals at reasonable multiples with quality assets that will fit back in with Smurfit," he said.

At today's price of 2,218p, the stock yields 3.2%.

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Jack Tang has no position in any 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.