Summary

Packaging group DS Smith (LON:SMDS) is reporting positive growth despite uncertain macroeconomic conditions. However, the group’s shares appear to be priced for value, suggesting a potential opportunity.

Bull points

  • DS Smith operates a circular models, producing, collecting and recycling its own packaging
  • The group only produces cardboard and paper-based packaging, most of which is highly recyclable
  • Structural trends such as ecommerce growth, urbanisation and sustainability mean that the company expects volume growth to outpace GDP growth in its markets
  • The shares look affordably valued with a positive momentum outlook

Bear points

  • This sector is cyclical and there are already early signs of weaker volumes due to slowing economic activity
  • The company has pushed through significant price increases to reflect higher input costs, but customers may ask for price cuts if commodity prices ease
  • DS Smith’s profitability has lagged behind UK-listed peers in recent years

Profile

About the stock

DS Smith (LON:SMDS) operates in the Basic Materials sector and is part of the Containers & Packaging industry group.

The group’s shares currently trade at 315p on the LSE Main Market. DS Smith is a member of the FTSE 100 and has 1.4bn shares in issue, giving a market cap of £4.3bn. Free float is 96%, so liquidity should be excellent.

The StockRanks are highly favourable for DS Smith, with particularly strong ValueRank and MomentumRank scores. The company is classified as a Balanced Large Cap Super Stock by Stockopedia’s algorithms.

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After a year-to-date share price decline of 20%, DS Smith shares are showing signs of entering an uptrend, with a high, improving StockRank:

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About the opportunity

DS Smith is classified as a Super Stock, indicating that it could be a good, cheap and improving business.

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The potential opportunity here is that the business will continue to grow, while also delivering improved profitability and a higher valuation rating. This could lead to significant share price gains over time.

However, this is a cyclical business as well. I think it’s instructive to consider the opportunity through the lens of Peter Lynch’s six categories.

Lynch said that stocks could often fit into more than one category. In this case, I’d argue that DS Smith fits into both the Stalwart (>GDP growth) and Cyclical categories.

In other words,…

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