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NEW YORK (dpa-AFX) – Given the high inflation in food and energy sources, Morgan Stanley is concerned that consumers will sooner or later cut back on their daily necessities. Rising costs of production, wages and sales are likely to put an additional burden on the consumer goods industry, as well as undermine profitability. Therefore, the team around the analyst Pinar Ergun is advising investors in the sector inquiry available on Tuesday to remain selective.
US investment bank experts see the greatest risk to future declines in market expectations among the stocks they have priced in for Henkel (Henkel vz), Nestle (Nestlé) and Unilever. Consequently, they lowered the privileged share of Henkel, a producer of hair care products, detergents, cleaners and adhesives, from “equal weight” to “underweight” and reduced the target price from EUR 62 to EUR 56.
They lowered Swiss food manufacturer Nestle’s paper from “Overweight” to “Equal Weight”. They lowered the target price from 137 to 123 francs, even if the company remains their preferred stock in the food sector and a staple investment for investors. They left Unilever on an “equal weight” level, but lowered their target price from 3,800 to 3,550p.
In addition, analysts have lowered their price targets for many other stocks in the sector, such as Beiersdorf, which is still underweight, or Danone and L’Oréal, which are still rated “equal weight.” They also cut their price targets for stakes in alcoholic beverage producers such as AB Inbev (Anheuser-Busch InBev), Diageo and Pernod Ricard, while stakes in tobacco producer BAT and household cleaning products producer Reckitt (Reckitt Benckiser) were overweight and have not changed. 3780p for BAT and 7100p for Reckitt have been confirmed. Reckitt and Pernod are the favorite stocks of Morgan Stanley experts in the European consumer goods sector.
An Ergun analyst is still expecting good reports from companies in the sector as Q2 draws to a close. The ability to counter current trends continued in the first half of the year, which should also be reflected in strong sales in the second quarter. But it shouldn’t go on like this anymore.
Rising food prices in particular posed a risk to overall consumption, especially in emerging markets, an analyst wrote. Consumers who would benefit from the huge savings in the wake of an all-lockdown pandemic are likely to feel the full impact of rising living costs. This poses a risk to demand. According to Ergun, due to the growing pressure on margins, this should put the defensive values of the industry to the test. He sees operating profitability, expressed in corporate EBIT margins, below pre-Covid-19 levels by 2025. At that time, it was about 20%.
At the same time, Ergun and her colleagues are not assuming a recession in their base forecasts, and they also believe that the sector is also not pricing in a recession. “In the event of a stronger overall economic slowdown, we assume a downward trend of more than 30 percent.”
Based on an “overweight” rating, Morgan Stanley expects the stocks to deliver above-average aggregate returns compared to other stocks in the same industry tracked by the bank. Rated “equal weight” and a relatively average overall return on equity is expected, and underweight an overall return below average. The basis is a period from twelve to 18 months.
The “In Line” notation used to evaluate Morgan Stanley’s four core sectors – food, household goods, beverages and tobacco – means the bank is sector neutral to its benchmark for the next 12-18 months.
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Morgan Stanley Analytical Institute.
Original study published: 28/06/2022 / 04:00 / GMT
Initial distribution of original study: 6/28/2022 / time not specified / GMT
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