DS Smith LON:SMDS shares have roared ahead this year, rising 53% over the last six months and nearly 80% year-to-date. But after the latest set of results the rally is beginning to stall, leaving investors wondering if the shares are overvalued.
We are seeing two conflicting sets of signals here and the answer will depend on whether you are looking for a short-term or a long-term bet on the shares.
DS Smith, which provides retail, industrial and ecommerce packaging with a growing focus on recycling, is heavily dependent on packaging demand in the US and the larger EU countries, its main markets. The European paper and packaging industry is heating up with major mergers like Smurfit Kappa-WestRock [LON:SWR] and DS Smith-International Paper. These deals are streamlining operations and boosting profitability by economies of scale and expansion into new markets or customer bases.
- IPO Radar: Venture Global, Shein and RC Fornax
- McBride shares up over 20% as dividends are restored
- B&M’s lack of e-commerce strategy may cost investors dear
However, the ability to achieve a combined integration rate of 90% could be disrupted by large customers.
“The corrugated packaging segment is seen as the ‘crown jewel’ for DS Smith given the large customer base, namely the food sector. Although, 2025 could see pricing pressures derived from flat and/or reduced volume in the corrugated box market,” said Olly Anibaba, senior analyst at independent research company Third Bridge.
Regulation in countries like Italy, Germany, France and Switzerland is creating a push towards a higher level of sustainability in packaging and this, combined with the booming e-commerce sector and FMCG customer demand, is driving the industry transformation. As part of this, DS Smith is transitioning away from plastics and into more eco-friendly products such as e-commerce recyclable packaging or GreenTote, a reusable container.
Medium-term signal is a strong positive
Technical analysis specialist Trend Intelligence has a strong positive signal on the stock saying that its medium-term view for DS Smith is “a continuation of its aggressive positive trend”. Price action is currently operating above the medium length moving average and above the Japanese cloud indicator.
Trend Intelligence has a 100% positive outlook on the stock, something we don’t see very often. Trend’s most recent red candle trades below the yellow medium length moving average. The shorter length white moving average is far above the yellow medium length moving average. Also, the most recent red candle trades far above the blue shaded Japanese cloud as does the blue delay line.
All three of Trend’s D*, R* and M* momentum indicators are also sending a positive signal. The +D* area is far above the red –D* line. Both the R* area and the yellow signal line are positive. Finally, the red M* line operates far above the yellow and blue signal lines.
DS Smith’s high P/E ratio is a slight warning sign
However, there are some warning signs. DS Smith’s price to earnings ratio is at a relatively high 33X indicating that the stock is already valued at the higher end of its scope.
AI stock analysis service Bridgewise has rated DS Smith as Underperform following the company’s latest set of results published in December. DS Smith company reported a 4% decline in revenue to £1.69 billion. Its net income was £21.5 million, a 79% drop in EPS compared to the same quarter last year. DS Smith is in a cash flow deficit of £46m, significantly deeper than the £10.5m deficit in the same period last year. Despite no improvement in cash flow, the company paid out £82.5m in dividends.
So what to make of these conflicting technical and fundamental signals? In the short run there could be some more consolidation in the stock given the weak set of results but in the more medium term the outlook seems to be far more positive.
What is very clear is that as it stands DS Smith is not a stock to invest in and then stop paying attention to. For the moment, a healthy dose of caution could be the best approach.
