I reckon DS Smith (LSE: SMDS) is a value stock investors should be considering adding to their holdings. Here’s why!
Card-bored
DS Smith is one of the largest packaging businesses in the world. It specialises in corrugated cardboard packaging. I’d argue cardboard and packaging isn’t exactly riveting or exciting on the surface of things. However, when you consider how much packaging we require for all sorts of day-to-day activities and tasks, I believe there is a potentially terrific investment opportunity here.
Over a 12-month period, DS Smith shares are down only 1% from 305p to current levels of 302p. However, macroeconomic volatility has meant the shares have struggled and dropped 18% from 368p in February to current levels. Without the issues of recent months, I reckon there’s a good chance the shares would be trading much higher.
The bull and bear case
I can understand why DS Smith shares haven’t been able to rise and push through the current volatility. A weakened economic outlook with lower consumer spending has led to a fall in demand for packaging. This shorter-term risk is something I’ll keep an eye on as it has the potential to impact performance as well as returns.
Another issue I’ll continue to monitor is soaring costs. This is linked to higher inflation but I find myself wondering if this higher level of costs could become the new norm for DS Smith? The higher cost of raw materials needed to manufacture packaging could take a bite out of DS Smith’s profits.
Moving on to the good stuff then. I think DS Smith shares’ valuation is attractive, with a price-to-earnings ratio of just eight. In addition to this, there looks to be a decent passive income opportunity with a dividend yield of over 6%. This is higher than the FTSE 100 average of 3.9%. However, it’s worth remembering dividends are never guaranteed.
A pre-close trading statement released at the end of October for the half-year period ending 30 October made for good reading, if you ask me. DS Smith said corrugated box volume performance continues to rise each quarter. Crucially, the firm added that pricing remained more resilient than expected and this was a reflection on the excellent relationships it possesses with its customer base.
I reckon DS Smith’s recipe for success is linked to its manufacturing capacity, its wide footprint, as well as its vast experience in the market. In fact, it is currently the largest manufacturer of packaging in the whole of Europe! These factors combined have led to consistent growth over the years.
Finally, when I think that e-commerce is arguably becoming the new norm for shopping, demand for packaging and DS Smith’s services are only set to rise.
Final thoughts
To conclude, I think DS Smith shares are seriously underappreciated and undervalued. The firm’s profile, capacity, and performance track record are enviable, in my opinion. With such an enticing valuation, I reckon investors should be taking a serious look at the shares.
However, I will say I don’t expect DS Smith shares to remain so cheap, especially once volatility subsides eventually. At that point, I’d expect them to steadily climb.
