Shares in a British packaging company Macfarlane Group (LSE:MACF) looks very attractive to me. As far as I know, there are only three analysts covering the company’s shares and I believe that the market is underestimating the company’s prospects.

Earnings are currently depressed due to, in my opinion, cyclical pressures, but the stock is trading at an extremely low multiple. As a result, the stock price reminds me of a coil spring.

What does MacFarlane do?

MacFarlane is a packaging company. It adds value to its customers by reducing waste, reducing breakage costs, and improving transportation and storage efficiency.

About 86% total revenue comes from the distribution department. As the largest packaging distributor in the UK, it benefits from economies of scale which facilitate reduce costs.

The second part of the business is production. This is a smaller proportion of group sales, but the higher margins resulting from its focus on bespoke packaging for high-value products mean it contributes 26% of operating profits.

Acquisitions were key to MacFarlane’s strategy. As of 2020, the company has added 10 separate companies to its organization, representing a significant step in its growth.

Discount prices

Macfarlane shares are currently trading at a price-to-earnings (P/E) multiple of less than 12, which is the lower end of its 10-year range. However, considering the company’s recent results, this is not completely unfounded.

Macfarlane P/E ratio 2015-2024

Source: TradingView

The company’s most recent earnings report reported a decline in both sales (8%) and profits (4%). And it would be even worse if it weren’t for the effect of several recent acquisitions.

Manufacturing revenues were mighty, but lower prices and volumes on the distribution side resulted in a decline in overall sales. Management largely attributes the weaker demand to cost-of-living pressures.

The risk for investors is that these trends will prove constant, and there is little Macfarlane can do about it. And if earnings continue to decline, I see no reason to expect the P/E ratio to raise from its current level.

Investment thesis

Even with continued inflation weighing on consumer demand, I believe there is a good chance earnings will raise from current levels. One reason is recent acquisitions.

In its latest report, management noted that the acquisition of Polyformes (completed in July) should boost earnings from the next update. Therefore, I expect strength in the production department.

Investors should also note that Macfarlane’s growth has been exceptionally mighty over the past few years. As a result, earnings per share (EPS) have grown by an average of 8.5% over the past decade.

Macfarlane EPS Growth 2020-2024

Created in TradingView

I think the company can return to growing its earnings in 2025. And if that happens, I see a clear opportunity for the stock to trade at a higher multiple, providing investors with a mighty return.

My target price

If earnings per share return to 10p (2022 levels), I think the stock could trade at a P/E multiple of 15 (midpoint of the 10-year range). This puts the share price at £1.50, 39% above its current level.

I think that could happen in 2025. However, even if it takes three years, investors could still do very well owning the stock – even before factoring in the dividend at the current yield of 3.34%.