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.
The post I’d invest my first £1,000 in this high-yield FTSE 100 business today appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Have Barclays shares just become a must-buy bargain?
Should I buy Lloyds shares for 2024? 3 reasons why my answer is NO!
3 top dividend-paying stocks I’d buy to earn a second income before a year-end rally
I’d buy these 2 cheap FTSE 100 shares in a heartbeat!
How I’d aim for a £1m Stocks & Shares ISA starting with £10k
Zaven Boyrazian has no position in any of the shares mentioned. 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.
