One of the most potent catalysts on any company’s share price is earnings growth. Certainly, low valuations are attractive and high yields can boost total returns, but to outperform the market most stocks need to deliver strong and consistent profit growth. Reporting today is packaging company DS Smith (LSE: SMDS), with its update providing guidance on its potential as a growth play.
Its strategy of making acquisitions seems to be paying off. DS Smith is on track to meet guidance and believes that packaging has an ever increasing relevance in a dynamic retail and consumer environment. It’s investing in innovative products in the media and in-store spaces and recent acquisitions such as Gopaca (which is expected to complete in the first half of the current financial year) are forecast to positively impact its earnings.
Looking ahead, DS Smith is due to report a rise in its bottom line of 12% in the current year, followed by 6% next year. These figures follow four years of double-digit earnings growth that show DS Smith is a reliable as well as high-growth company. Its valuation indicates that there’s scope for an upward rerating, with it having a price-to-earnings growth (PEG) ratio of only 1.2.
One cloud on the horizon is the impact of Brexit on the eurozone. While the impact of this on DS Smith’s business performance is a known unknown, its wide margin of safety means that its risk/reward ratio remains highly enticing. As such, it’s a sound long-term buy that could easily outperform the wider index based on its growth potential.
Higher grow or lower risk?
Of course, there are other stocks that offer significantly higher rates of growth than DS Smith. For example, Tullow Oil (LSE: TLW) is due to record a rise in its bottom line of 140% next year as it ramps up production. This is part of a switch in strategy that will see Tullow become an increasingly production-focused business, with the direct consequence of this likely to be improving profitability and stronger cash flow.
Similarly, Standard Chartered (LSE: STAN) is expected to record a rise in its earnings of 122% next year. This puts it on a PEG ratio of 0.1, which is the same as for Tullow Oil, and indicates that it offers growth at a very reasonable price. Longer term, Standard Chartered has the scope to grow its earnings due to the rising wealth of the middle class in Asia as well as forecast demand for more credit as the Chinese economy transitions towards a consumer-focused rather than capital expenditure-led entity.
However, DS Smith still has appeal versus those two stocks as a growth play. It comes with less risk since Tullow is highly dependent on the price of oil and Standard Chartered is in the midst of a major recovery phase. As such, for more risk-averse investors, DS Smith could be the pick of the three in the long run.
Peter Stephens owns shares of Standard Chartered. The Motley Fool UK has recommended DS Smith. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.