The FTSE 100 has managed to withstand the bulk of the volatility plaguing the markets of late. But the same can’t be said for all of its constituents. DS Smith (LSE:SMDS) is one example of a leading British business that’s seen its valuation get slashed due to economic turbulence.
The stock is down 40% since its peak in October 2021. And since the start of 2023, shares have continued to slide another 10%. But does this present an attractive entry point for long-term investors?
Cardboard is the new gold
DS Smith is the largest sustainable cardboard manufacturer in Europe. But as dull as that sounds, paper packaging has become increasingly valuable on the back of rising e-commerce adoption. So much so that management has been able to exercise some significant pricing power, even in the current economic climate.
In the 12 months leading up to April, box volumes shrunk 5.8% on a like-for-like basis. This isn’t too surprising, given the reduced level of online spending in the face of rising inflation and interest rates. And yet, price hikes pushed revenues up by double digits to £8.2bn, with underlying earnings rising even faster, by 40% to £861m.
Since then, the pricing environment has started to weaken as economic conditions worsened. However, cost-cutting paired with steadily recovering volumes has offset a large chunk of this impact. As such, management now expects underlying profits for the first half of its 2024 fiscal year (ending April) to land at £360m.
That’s down from the £418m reported over the same period last year. However, performance in the second half is expected to improve further, placing the firm in an ideal position to ride the tailwinds of a recovering economy. And this might have already started.
One of DS Smith’s largest customers is Amazon. And the e-commerce giant just reported double-digit sales growth in its latest quarterly results.
Every investment has its risks
When investing money into the stock market for the first time, it’s often wise to start with a proven industry leader trading at a reasonable price. DS Smith certainly fits into that category, in my mind, with a £4bn market capitalisation, 8.1 price-to-earnings (P/E) ratio, and 6.2% dividend yield. Yet even the largest companies in a sector still carry investment risk.
Economies across Europe appear to be making steady progress in recovering from inflation. That bodes well for DS Smith since 92% of its income stems from this region. However, with winter approaching and energy prices likely to rise, further interest rate hikes might be required to keep inflation in check. And that could potentially undo some of the recent volume recovery.
The uncertainty could be why this FTSE 100 enterprise currently trades at a modest valuation. And should the macroeconomic environment take a turn for the worse, this stock may continue to trend in the wrong direction.
Having said that, the long-term demand for sustainable packaging materials doesn’t appear to be disappearing anytime soon. Therefore, if I were kick-starting a new portfolio today, DS Smith looks like an attractive long-term opportunity. At least, that’s what I think.
