Shares in FTSE 100 packaging group DS Smith (LSE: SMDS) experienced a sharp sell-off late last year on the back of global growth concerns. Packaging is generally seen as a proxy for global trade, so as concerns over slowing global growth and the possibility of a global recession increased in the lead up to Christmas, many investors dumped the stock. Beginning the fourth quarter of 2018 at a share price of just under 500p, by the end of the year, DS Smith was trading at 299p – a significant quarterly decline.
This year, DS Smith shares have rallied. Year to date, the stock is up 18%, outperforming the FTSE 100 by over 10%. That’s a strong performance in the space of six weeks or so. However, looking at the investment case for DS Smith, I think there could be plenty more gains to come. Here are four reasons why.
For starters, I think the fears of a global recession were overblown last year. Investors were concerned before Christmas that trade wars between the US and China might cause a full-on global meltdown in 2019. Yet I don’t see this as a likely outcome. I do think global growth will probably slow this year, relative to the last few years, but I’m not expecting a full-scale catastrophic collapse like we experienced during the Global Financial Crisis. So, I think the 40% sell-off in DS Smith shares in Q4 was excessive. This leads me to believe that the shares could continue to rebound from current levels.
Buoyant packaging sector
Furthermore, the packaging sector appears to be faring quite well at present. Just this week, rival Smurfit Kappa released relatively solid results, with revenue rising 4% and pre-exceptional earnings per share (EPS) surging 58%. The company also raised its dividend by 12%, which suggests that management is confident about the future.
DS Smith’s own half-year results, released in early December, also looked good, in my view. Revenue was up 16% and adjusted EPS increased 9%, and the group took the opportunity to lift the interim dividend by 14%. Again, that indicates confidence from management.
E-commerce growth story
Another reason I like the look of SMDS right now is that the packaging sector is essentially a play on the online shopping boom. This provides a long-term growth story. Online shopping is continuing to grow at a healthy clip, and I think this should support demand for cardboard packaging going forward. Whether you’re buying a mattress in a box, a pair of trainers, or a new pair of sunglasses, your goods tend to come packaged in a cardboard box. As a key supplier of packaging for Amazon UK, DS Smith looks well placed to capitalise on the e-commerce boom.
Finally, there’s DS Smith’s rock-bottom valuation to consider. With analysts forecasting EPS of 36.2p per share for the year ending 30 April, the stock currently trades on a forward P/E of just 9.8. That looks too cheap to me. Given the growth story here, I think the stock could easily support a P/E of 13 or even higher, which would equate to a share price of at least 470p.
So, overall, I see considerable value in DS Smith right now. The shares are up 18% this year so far, yet I think there could be plenty more gains to come.
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Edward Sheldon owns shares in DS Smith. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.