Is this a far better way to play the boom in online retail?

Should these two companies be at the top of your shopping list as we approach the festive season?

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Rather than go to the trouble of visiting city centres, finding a place to park and trudging around shops laden with oversized bags, more of us than ever are appreciating the convenience that comes from ordering online. For evidence of this, just look at the recent numbers from pureplay fashion retailers like Boohoo.Com or compare the latest online sales figures from Next to those from its stores. 

With the festive period fast approaching, things are likely to get even better for those companies that offer consumers a quality online experience. While this is good news for those holding their shares, there may be another, less obvious way of profiting from this change in behaviour. Let me explain.

Box it up

While online retailers offer convenience, they also need to ensure that goods arrive in perfect condition. This is clearly great news for businesses like DS Smith (LSE: SMDS), one of Europe’s leading providers of corrugated packaging.  

Shares in the £3.7bn FTSE250 constituent currently trade on a tempting forecast price-to-earnings (P/E) ratio of 12, a little less than peer Mondi (on 13) but slightly more than Smurfit Kappa (on 9). A forecast yield of just over 3.5% isn’t the highest available on the market but it should be easily covered by earnings. Another attraction for income investors is that the company has an excellent history of regularly increasing this payout, with annual dividend growth frequently reaching double figures. 

There’s a lot to like about DS Smith, particularly profits that are expected to rise to £281m (from £167m) in the current year. That said, its balance sheet is starting to look rather stretched with net debt now hitting £1.1bn. While this may not be a cause for concern at the current time, prospective investors should be comfortable with this before considering adding the company to their portfolios.  

Higher returns?

If shares in DS Smith and similar packaging providers don’t appeal, Leeds-based Clipper Logistics (LSE: CLG) offers another way of playing the aforementioned boom. Focused on providing e-fulfilment and returns services to many of our most popular brands, including ASOS, H&M and Supergroup, Clipper has been and should continue to be a major beneficiary of the switch to ordering products via our tablets and smartphones. The recent announcement of a 10-year deal to support John Lewis from a new, 50,000 square ft distribution centre in Northampton only adds to the company’s appeal. It’s long-term contracts like these that make me increasingly optimistic about Clipper’s future.

Since the dark, post-referendum days of early July, shares in the company have jumped over 57% from a low of 224p to 352p. As a result of this, they now trade on an initially off-putting forecast P/E of just under 26. Nevertheless, I think the investment case remains strong. Clipper’s balance sheet looks solid and the business has shown that it’s capable of delivering excellent returns on capital (a hallmark of a quality company) despite operating in a traditionally low-margin industry. Its £348m market cap suggests there’s plenty of room to grow and its already-enviable and varied list of clients should give investors another form of diversification they wouldn’t get from holding shares in just one retailer, particularly one in the fickle fashion market. The forecast yield of 2.1%, while modest, is yet another positive.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

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