Invest-ability daily 28/09/21: Paper chase

Why the e-commerce boom isn’t necessarily good news for packaging producers Mondi and DS Smith

Box clever?

How much packaging does it take to deliver a pizza paddle? The answer, according to Amazon and as you can see above, is a box that could contain at least 15 pizza paddles stuffed with enough paper to get my log burner started for the entire winter.

I am sure there is a very good reason why Amazon would choose to package my delivery in such a way – having read The Everything Store, I’m well aware that this is a company where nothing happens by accident, at least in the long run and especially on the logistics side of the business. It is, underneath everything else, the world’s most efficient delivery machine.

But in a world where we often bemoan the wastefulness of society, it somehow doesn’t seem right that my desire for a pizza paddle can result in such a tremendous amount of rubbish – even if I am grateful for the partial solution to the impending energy crunch. And, yes, if I wasn’t burning the paper, it can of course be recycled. But that’s still another industrial process that wouldn’t be necessary had the paddle turned up in a smaller box.

At least shareholders in paper companies like DS Smith and Mondi can take comfort in the voluminous amounts of packaging now occupying my shed. And if a share price can tell a story, both have the pandemic to thank for a reversal in fortunes. Until March 2020, both had been in downtrend, reflecting the normal ups and downs of being in a bulk commodity market. But since the pandemic struck and ecommerce became the only way to satisfy our insatiable urge to shop, both have seen their share prices rise sharply.

As with many pandemic habits, the big question is just how sticky they are – now the shops are open again, will people return to them or keep ordering online? DS Smith gave us a clue earlier this month when it said that box volumes had continued to rise this year and were ahead of levels seen in 2019 and that “the long-term structural growth drivers of e-commerce and sustainability have been accelerated by the effects of Covid” – much the same thing that Mondi revealed a month earlier in its half-year results.

But both have also pointed to rising commodity prices and economic uncertainty as potential obstacles to further progress – a more familiar tale for these companies than we’ve heard from them during the pandemic boom year. In Mondi’s case, revenues were up 5 per cent over the half year thanks to higher volumes and price increase, but pre-tax profits were marginally lower as raw material costs rose. DS Smith hasn’t given figures yet, other than to say it’s “confident” about its prospects, but one can imagine it will be much the same story.

Whether or not that makes either company a good investment I’m not yet sure – neither share looks particularly expensive on a forecast PE basis, although SharePad data reveals a deterioration in underlying profit margins and slowing returns on capital which is perhaps why. Indeed, put the sexy story of a pandemic delivery boom to one side, and these are businesses that are constantly juggling with input costs and the need to invest in expensive machinery, and how much of that they can pass on to their customers – classic cyclicals in other words.

And if my recent Amazon experience is anything to go by, they may also be on the wrong end of another trend – the very real need to reduce packaging waste. Both companies talk about sustainability and circularity (i.e., recycling), and probably box tick a few ESG credentials as a result, but I’m fairly certain that the most sustainable long-term solution is to use far less packaging when delivering pizza paddles and the rest of life’s luxuries.

Enjoying this article?   

Join our list for more quality insight and analysis. No spam, unsubscribe any time.

%d bloggers like this: