I find FTSE 100 packaging stocks like Smurfit Kappa, Mondi, and DS Smith (LSE: SDMS) very interesting right now. In my view, they are financially sound companies in any case, to be sure, but they also are part of bigger trends. These trends, in turn, shed light on how the rest of my investments could behave going forward.
Bigger trends captured by these FTSE 100 stocks
One such trend is the progress in online shopping. We know that last year saw a boom in e-commerce, thanks to the pandemic. But incoming data now shows whether that growth can be sustained. Since packagers are a crucial part of the e-commerce ecosystem, performance at these companies is a good indicator of the sector’s progress.
Another big trend captured is inflation. These companies have highlighted in the past that paper prices are a challenge. After the budget yesterday revealed that inflation next year will average 4% next year, I am even more interested in knowing how price rises are impacting FTSE 100 companies.
What does DS Smith’s trading update say?
It is with these two consideration in mind that I looked at DS Smith’s latest trading statement. The company continues to affirm strong growth in e-commerce despite the reopening of bricks-and-mortar retailers. While not providing any numbers, it adds that “Corrugated box volume growth has been very good throughout the first half.” Here, first half is in reference to its financial year, and for the period ending 31 October. I take this as a positive for both the stock and my investments in online shopping related stocks.
It also underlines that costs are rising, including for energy and logistics. However, I am heartened by the fact that DS Smith has been able to pass on these price increases so far. This of course suggests that inflation could spiral if enough companies started increasing prices. But it also indicates that for now demand is strong.
A lot going for it
That also bodes well for my stock market investments for now. And of course, for DS Smith. The company already has a lot going for it. It is in a growing sector, and is profitable too. Its profits did slip for the year ending 30 April 2021 because of increased coronavirus-related costs. And it would have been somewhat concerning if they had fallen again in the current financial year. This was entirely possible if it had not raised prices in response to rising costs. But it did, and successfully. so there is hope yet.
The challenge and what I’d do
The challenge, though, is that DS Smith is pricier than the average FTSE 100 stock, with a price-to-earnings (P/E) ratio of almost 29 times. The FTSE 100 average is about 20 times. If its earnings improve from last year, it could look reasonably priced again, though. I have been positive on the stock in the past, and still am. But this time, I want to wait for its detailed earnings update in December before deciding whether to buy it or not. The answer will depend on its updated P/E.
Manika Premsingh 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.
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