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New FTSE 100 entrant DS Smith plc could still make you brilliantly rich!

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DS Smith (LSE: SMDS) is up an impressive 37% in the past 12 months and 147% over five years. That is the type of form to drive a company into the FTSE 100, which is exactly what has happened, with the group joining the index of leading stocks in November’s quarterly reshuffle.

Tidy package

Today the paper and packaging company published its first set of results since its elevation but investors are reluctant to celebrate, with the stock down around 2% to 533p at time of writing. That is despite a generally positive set of half-yearlies which include a 19% rise in revenue to £2.8bn, or 14% at constant currency. Adjusted operating profit was up 11% at £251m (6% at constant currency).

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The results did show a 1% drop in unadjusted profit before tax to £144m, or 5% at constant currency, which was largely due to higher paper prices and acquisition-related financing costs. However, there was still plenty of good news, with management successfully passing on most of the paper cost increases to customers and also keen to highlight 5.2% organic volume growth, as well as e-commerce and pan-European strength, and an excellent start from Interstate, its first fibre-based US business. However, DS Smith isn’t the only packaging company I like as you can see by clicking here.

High synergy

The company also claimed that the benefits of its global supply chain are now validated and being delivered, with the group raising its annualised pre-tax cost synergy target to $30m, up from a previous figure of $25m. The business is gaining market share and benefitting from the growing need for  e-commerce parcel packing, and has also enjoyed a boost from the recovering European economy.

Adjusted earnings per share (EPS) rose 6% higher to 17.4%, although statutory EPS fell 14% to 10.6p, due to higher amortisation and adjusting items, and the expanded number of shares in issue.

Group chief executive Miles Roberts declared himself “delighted” with the group’s volume growth, which was boosted by structural shifts including changes in consumer preferences and the rise in e-commerce. He said: “Our operating margins are in line with our expectations, despite the substantial input cost pressures in the period, which we continue to recover as planned.”

Paper tiger

DS Smith continues to expand in North America and Europe, and management is confident about the outlook. What really surprises me is that the stock still trades at what looks like a bargain valuation of just 15.9 times forward earnings. Given its recent storming share price performance I would have expected a higher figure than that.

The forecast dividend is a reasonable 3%, covered 2.1 times, and today’s results show progression with management hiking the interim dividend per share 7% to 4.9p. This is a reminder of exactly why shares thrash cash. The group has delivered double-digit EPS growth for the last five consecutive years although City analysts suggests the pace may slow. After 19% growth in the year to 30 April 2017 they are predicting just 2% this year, but fear not, that rises to 12% the year after.

Given today’s solid results, positive growth outlook and unthreatening valuation, DS Smith looks a promising option for those who want to get seriously rich on the stock market.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. 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.

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