Friday tips round-up: DS Smith, BTG

5th Dec 2014 11:55

Specialist packaging manufacturer DS Smith has proven adept at growing with its clients, acquiring rivals and moving into new niches and geographies. That has seen the company transformed from a maker of paper into a manufacturer of higher-margin specialist packaging. A case in point is the recent agreement with Mondelez, with whom it has entered into an exclusive five-year contract to provide specialist packaging. So too is the company's ability to adapt to the evolving needs of clients such as Aldi and Lidl. That has allowed the firm to battle against headwinds such as weak consumer spending in the Eurozone or a depreciating single currency.In parallel, margins have been improving and returns on capital employed came in at 13.8%. Both metrics were in the top half of the range which the company had set for itself. That sent pre-tax profits rocketing 45% higher in the six months to the end of October. The outfit is also looking to keep expanding in other countries and management's track record on this score looks solid. On 13 times earnings the valuation does not look excessive and is in-line with that of peers. Hence, the stock is a long-term 'buy', writes The Times's Tempus.When a company tries to justify a purchase on the basis of a previously unknown valuation metric one should be cautious. Specialised healthcare outfit BTG has done just that. It purchased PneumRx, the interventional treatment for emphysema, for about two times total potential sales. Estimated peak sales for that drug could beat $250m by 2020, versus a purchase price of $475m if it reaches that target. However, while revenues from that project have been growing at a 60% clip they were only $16m last year.Furthermore, reaching that milestone depends on the treatment obtaining regulatory approval in the US, which is expected for 2016. BTG is adamant that the acquisition makes senses even if clearance Stateside is denied. Nevertheless, that takes a fair amount of trust. So, selling on 48 times earnings, "I would be tempted to take some profits," Tempus says.