The FTSE 100 stock DS Smith (LSE: SMDS) has seen a 9% increase in its share price in the past month. This was helped by a sharp spike yesterday that was no coincidence. The packaging provider released a positive trading update yesterday, which clearly went down well with investors.
Can it rise further in the short-term?
Its performance over the past year is even more impressive, with a 57% increase in share price. Yet, I believe that this is not a stock to hold for the short term. In fact, I think over the next few months or so, it may just show unenviable increases. The first reason for this is the run-up in share price it has already seen.
As a beneficiary of the increased dependence on online sales during the lockdowns, DS Smith saw unexpected growth after an initial wobble as the pandemic struck. Its price-to-earnings (P/E) ratio now is almost 35 times. This is certainly not the highest among FTSE 100 stocks, but I can think of plenty of examples of stocks with high potential and lower P/E. Also, there is no guarantee that growth will continue at last year’s high rates now that we are back to normal, hopefully for good.
Structural shifts in its favour
However, I do believe that in the long term, its share price can give significant returns. Structurally, there is an ongoing shift towards online shopping. As a consumer, I myself have eased far more into e-shopping and reckon that is true for many others. This also explains why the segment continues to show strong growth even though lockdowns have lifted.
In its trading update, DS Smith alludes to this as well. It says “The long-term structural growth drivers of e-commerce and sustainability have been accelerated by the effects of Covid”. Further, it says that e-commerce is a priority for it, supported by an investment in technology.
Cyclical support for the FTSE 100 stock
A pickup in the economy can also impact it positively over the medium term, essentially because a rising tide lifts all boats. So far, the global economy is picking up well. This is a cyclical or medium-term positive for this multinational company. Even if we go back into lockdowns, it appears that nothing can go wrong for the e-commerce ecosystem for now, since demand for its products may just spike again.
My takeaway
For these reasons, I think DS Smith makes for a good buy for my portfolio even today. I would also consider it in the context of other FTSE 100 paper and packaging providers like Mondi and Smurfit Kappa.
I would however, watch out for cost inflation, which was on all their radars earlier in the year. However, DS Smith now reports that it has been able to successfully pass on increased costs. Inflation is widely considered to be a transient phenomenon for now. Central banks see it as an effect of the adjustment underway after the easing of lockdowns. There are those who believe that it can persist over time, though. If that is the case, I am not sure how much pricing power the company can continue to show.
On the whole, I like the FTSE 100 stock and would buy and hold it for the next 10 years.
