UK Edition
Questor: after a 45pc fall, this stock yields 5pc and makes a good defensive choice
Questor share tip: sales and profits at DS Smith, the packaging firm, are rising and margins look secure, yet the shares are cheaply valued
Stock markets have yet to recapture their balance after the declines suffered in late 2018 and as a result protection against further falls remains every bit as important as efforts to generate gains.
In such circumstances this column will stick with its plan of buying businesses that have strong competitive positions, lowly valuations and (where possible) a decent yield to help compensate for the risks involved.
One candidate to fit these criteria is packaging giant DS Smith, whose shares have tumbled by 45pc since this column issued a lukewarm update on the stock at 560p in May.
Worries over increases in Chinese production capacity, weaker containerboard prices and nagging concerns over online retail sales volumes have been cited by analysts as reasons for the share price slump, although a large acquisition in June and the £1bn rights issue to help pay for it appear to have effectively put a lid on the share price.
We are now left with a company with a strong position in its chosen field: a solid base of packaging business from the providers of consumer goods.
Nor should the long-term potential of ecommerce be neglected, since containerboard is the corrugated cardboard used by Amazon and other retailers to protect goods as they are shipped to online shoppers.
December’s interim results offered no real sign of margin pressure as sales rose by 16pc and operating profit by 32pc, on a like-for-like basis. Organic volume growth was 3.2pc, management coped well with rising input costs and a 14pc rise in the dividend spoke of confidence in the future.
Better still, DS Smith now trades on little more than eight times forecast earnings with a yield of more than 5pc. Such figures do not, hopefully, leave us too much of a hostage to fortune, and offer potential for gains if DS Smith keeps delivering and markets recapture their nerve.
A strategic review of the plastics business is a possible short-term catalyst for good measure. We upgrade to buy.
Questor says: buy
Ticker: SMDS
Share price at close: 306p
Update: Pressure Technologies
Our highly risky turnaround call in August on micro-cap stock Pressure Technologies is off to a shaky start but the precision engineering firm is making some progress.
The proposed sale of its biogas operation for £11.1m is a big step forward as it will simplify the business and help reduce its £6.7m net debt to further cut risk. Note also how the transaction price compares with the group’s £17.2m market value.
Full-year results last month did show the expected £3.1m loss but with orders at the core manufacturing operations up by between 36pc and 54pc year on year it may be that the worst is behind the firm. The oil and gas industry is leading the way here, as hoped, although the latest slide in crude prices must be watched.
This turnaround story is taking longer than expected but if earnings do hit bottom this year the shares could start to roll.
Questor says: hold
Ticker: PRES
Share price at close: 95p
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Update: Xaar
Very few companies slipped out a profit warning in the lull between Christmas and New Year but unfortunately one that did was Xaar, the digital inkjet printing specialist tipped here in July.
That completed a hat-trick of trading alerts from the firm and the shares initially fell sharply, although they then rallied strongly to offer this column at least a crumb of comfort.
We have clearly been too early in calling the turnaround, not least because the older ceramics business continues to decline more quickly than next-generation product sales are picking up. However, management continues to explore further partnerships at the printhead operations and the balance sheet had £36.8m in net cash as of September.
That provides some support to the stock and buys management and shareholders time while interest gathers in next-generation products.
We will therefore sit, hold and wait.
Questor says: hold
Ticker: XAR
Share price at close: 157p
- Questor archive: telegraph.co.uk/questor