- Sentiment has been weak towards the packaging sector
- Fears that stocks would see post-Covid slump in demand
- Yet DS Smith trading update much better than expected
Copper and shipping indices have historically been some of the key economic bellwethers, yet packaging companies have increasingly become important when investors try to work out if there is an increase or decrease in the amount of goods being moved around the world.
Judging by the performance of the main packaging companies on the UK stock market, investors have this year feared a big slowdown in global economic activity.
HOW MUCH HAVE THE SHARES FALLEN?
Shares in both Smurfit Kappa (SKG) and DS Smith (SMDS) were down more than 30% year-to-date up until the end of last week. Even sector giant Mondi (MNDI) was struggling on the stock market, with more than 20% share price losses.
Their share price declines are the market’s way of saying that earnings might lose strength and that trading is unlikely to be as good as during the pandemic.
WHY WAS THE PANDEMIC GOOD FOR PACKAGING GROUPS?
When everyone was stuck at home during the various lockdowns, people were bored and ended up splashing a lot of cash on goods to keep themselves entertained. The large number of online orders caused a surged in demand for cardboard packaging to house goods during transit.
It got to the stage where there were pleas for people to stop dumping cardboard packaging in their garage or down the side of the house. This used packaging needed to get into the recycling chain to help ensure they was enough material to make new cardboard boxes.
WHAT’S CHANGED NOW?
Even though the big packaging companies like Mondi continued to report decent earnings, the market has been losing faith in the pace of future earnings growth. Companies around the world have been talking about reduced demand as consumers rein in their spending, and that’s caused investors to be nervous about the packaging sector.
That is until now. DS Smith has come out with a statement that’s completely taken the market by surprise, hence why its share price has shot up.
Yes, corrugated box volumes have dipped a bit. But the key point that has caught the market’s attention is how the company has enjoyed pricing power.
It’s still generating significant amount of cash as a business, and it’s been able to pass on higher costs to customers. That has driven improved profitability and means its current full-year numbers are going to beat previous expectations.
HOW DID THE SHARES REACT?
DS Smith’s shares jumped 11.5% while Smurfit was up 6% and Mondi advanced 5%. Together they dominated the FTSE 100’s top risers.
This sets a positive tone for Mondi’s trading update which is scheduled for this Friday (14 October), followed by Smurfit which updates in three weeks’ time (2 November).
