DS Smith: A Tale of Underperformance and Opportunity
Tuesday, Jan 7, 2025 12:20 pm ET
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DS Smith, the international packaging giant, has been underperforming the broader market, with its shares falling on Tuesday. The company's revenue and earnings have been declining, with revenue in 2024 at 6.82 billion, a decrease of -17.02% compared to the previous year's 8.22 billion, and earnings at 385.00 million, a decrease of -23.31%. This decline in financial performance has negatively impacted the company's stock price.

DS Smith's valuation ratios indicate that the stock is overpriced compared to its peers. The trailing PE ratio is 33.60, and the forward PE ratio is 20.21, which are significantly higher than the industry average. This suggests that the market expects the company to grow at a slower pace than its peers, which could be another reason for the underperformance.
However, DS Smith's high valuation may also indicate strong growth prospects or high-quality earnings. Additionally, DS Smith's forward P/E ratio of 20.21 is lower than its trailing P/E, suggesting that analysts expect the company's earnings to grow in the future. This could present an opportunity for investors who believe in DS Smith's growth prospects.
DS Smith's high debt levels and low return on equity (ROE) and return on invested capital (ROIC) also contribute to its underperformance. The company has a debt-to-equity ratio of 0.77 and a debt-to-EBITDA ratio of 3.05, indicating high leverage. Additionally, DS Smith's ROE is 5.75% and ROIC is 4.22%, which are significantly lower than the industry average, suggesting that the company is not efficiently utilizing its capital.
Despite these challenges, DS Smith has undertaken strategic initiatives and acquisitions to drive long-term growth. One notable move is the proposed acquisition by International Paper (IP), which was approved by shareholders of both companies. This all-share combination aims to create a global leader in sustainable packaging solutions, with 90% of revenue from fibre-based packaging. The deal is expected to close in Q4 2024, subject to regulatory clearance and other customary closing conditions.
The acquisition is set to integrate around 500,000 to 600,000 tons of DS Smith containerboard into IP's mill system, raising the combined integration rate to around 90%. This will optimize a combined network of mills, box plants, and supply chains, boosting exposure to the e-commerce and fast-moving consumer goods (FMCG) segments. The combination is also expected to generate pre-tax synergies of at least $514 million on an annual run-rate basis by the end of the fourth year after the deal closes, including $474 million in yearly cost synergies and $241 million from operational synergies.
Upon completion, the combined company will be headquartered in Memphis, Tennessee, with DS Smith's London headquarters dedicated to the combined company's EMEA operations. This strategic move is expected to drive significant value for employees, customers, and shareholders, positioning DS Smith as a true global leader in sustainable packaging solutions.
In conclusion, DS Smith's underperformance compared to the broader market can be attributed to its declining financial performance, overpriced valuation, high debt levels, and low return on equity and invested capital. However, the company's proposed acquisition by International Paper presents an opportunity for long-term growth. Investors should carefully consider the risks and opportunities presented by DS Smith's current situation and the potential benefits of the acquisition.