There are few companies in the FTSE 100 that have achieved the same returns as packing producer DS Smith (LSE: SMDS).
Over the past decade, the stock has produced a total return for investors of 26% per annum, turning every £1,000 invested back in 2009 into more than £12,000 today.
Booming market
DS Smith is one of the world’s leading producers of packing products such as cardboard boxes, the demand for which has exploded over the past few years thanks to changing shopping habits and the rise of e-commerce.
These themes, as well as select acquisitions, have helped net profits expand 250% over the past five years alone, and analysts are predicting more growth over the next two years as DS doubles down on its growth plans. Specifically, analysts reckon the company’s earnings are set to expand 50% in 2019 and 14% in 2020. If the group hits these targets, management will have presided over net profit growth of nearly 600% in eight years — that’s the kind of growth most FTSE 100 companies would kill for.
However, while DS looks to be firing on all cylinders from the front, there is one main issue hanging over the business and that’s its debt.
Getting debt under control
Following 2017’s $1.14bn purchase of Interstate Resources, and the €1.9bn acquisition of Spanish rival Europac last year, the group’s net debt jumped to £1.7bn at the end of fiscal 2018, and its net debt to equity ratio ballooned to 81%.
To help reduce debt levels, and streamline the business, today DS announced that it is selling its plastic division to private equity firm Olympus Partners for an enterprise value of $585m. This should make a dent in the group’s obligations and help management’s efforts to re-focus the business as a “leader in sustainable packaging.”
The company also informed investors today that it saw an “especially busy” Chrismas period from e-commerce customers and, as a result, management thinks the company is firmly on track to meet City growth forecasts for the year.
Undervalued
Despite its growth potential, and track record, shares in DS are changing hands for just 9.9 times forward earnings today. In my opinion, this multiple severely undervalues the group’s potential because it seems to suggest that DS’s growth is coming to an end, which is just not correct.
Indeed, after factoring in the company’s projected earnings growth, the stock is trading at a PEG ratio of 0.7, telling us that the stock offers growth at a reasonable price. On top of this, the shares yield 4.6%.
That being said, the company has warned several times over the past few months that, due to Brexit, its growth efforts in the UK have been “heavily scaled back,” which will almost certainly impact growth over the next 12 to 24 months. However, after recent acquisitions, DS’s UK business accounts for less than 10% of overall revenue. So, while Brexit might have an impact on the group, I think the effect on growth will be minimal.
With this being the case, I think you should ignore Brexit and invest in DS today as it continues to chalk up one of the most impressive growth rates of any company in the FTSE 100.
