On Tuesday, Morgan Stanley (NYSE:MS) adjusted its stance on Unilever plc (LON:ULVR:LN) (NYSE: UL), downgrading the stock from Equalweight to Underweight and reducing the price target from £41.00 to £37.75.
Morgan Stanley's analysts expressed concerns about what could drive a further re-rating of the stock in the following year, as the current valuation appears to factor in successful execution of the company's strategies.
The analyst noted that while Unilever's management strategy appears sound, the timeline for reinvestment and the competitive nature of the market could pose challenges. Unilever's cash conversion is highlighted as being lower than the sector average due to consistently high non-underlying costs.
Additionally, despite a significant presence in emerging markets, which are expected to grow more quickly, the company's medium-term growth projections align with the sector average.
Morgan Stanley's revised price target reflects these considerations, with the firm suggesting that the stock's current price-to-earnings (P/E) ratio only commands a modest premium compared to the sector, despite these underlying issues.
The report also mentions Haleon and L'Oreal as preferred companies within the Household and Personal Care (HPC) sector. Haleon is favored for its consumer health category, which benefits from high brand loyalty and potential value creation from industry consolidation.
L'Oreal is recommended for its pure-play exposure to the global beauty market, which is expected to grow structurally, and its industry-leading ability to invest in marketing and innovation.
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