It stands to reason that FTSE 100 stock Tesco is dominating the financial headlines on Wednesday. The UK’s largest retailer is a perfect barometer for the issues the broader sector has experienced since the coronavirus outbreak.
With the grocery goliath all over the news, another Footsie share updating the market today has gone under the radar. DS Smith (LSE: SMDS) has put out a much brighter update than its blue-chip colleague. In fact it should be commanding much stronger attention given its success in these turbulent times. As a shareholder in this particular share, I am very happy with what I saw.
Geographical diversity creates strength
For the uninitiated, DS Smith is a business that provides packaging requirements for consumer goods companies. This includes, most notably, FMCG firms, and to a more limited extent, industrial firms. The FTSE 100 share operates in almost 40 countries and has a significant and rising presence in Europe and the US. Its sprawling presence has been underpinned by a strong appetite for acquisitions over many years.
It has a critical role in the supply of essential goods like foods and household products. And this gives it the sort of defensive strength needed in times of challenging economic, political and social times like these. That’s a quality it highlighted today when declaring that “trading since our update on 4 March 2020 has remained resilient with relatively limited impact from Covid-19 seen to date.”
Corrugated box volumes have been “good”, the firm adding that demand has actually picked up during the first six months of the current fiscal year (to October). Its operations in Southern Europe have endured some weakness, sure. But the impact has been much less in the north of the continent. And in Eastern Europe, the pandemic has had no “meaningful effect” at all. Recent trading in North America meanwhile is described as being “robust.”
One of my favourite FTSE 100 stocks
As one would expect, panic buying means that its activity within the grocery sector has been particularly strong in recent weeks. This is not the only reason why it has thrived, however. It has also benefited from rising online demand for both discretionary and essential items. No doubt this is a reflection of increased numbers of shoppers switching to internet retailing because of lockdowns. E-commerce is a segment in which the business has ramped up investment in recent times.
A fly in the ointment is that DS Smith decided to axe the interim dividend given the uncertain outlook for the global economy. But this is a prudent step in the circumstances. And it’s certainly no suggestion of a weak balance sheet. Its net debt-to-EBITDA ratio should still come in at a healthy 2 times as of the end of April. And it has £1.bn worth of undrawn loan facilities.
At current prices DS Smith trades on a forward P/E ratio below 10 times. This is far too cheap given its mighty defensive qualities, I believe. And let’s not forget its exceptional long-term outlook. I’m tempted to load up on some more of this FTSE 100 share at current prices.
