On Friday, Morgan Stanley downgraded B&M European Value Retail SA (BME:LN) (OTC: BMRRY) stock, changing the rating from Equalweight to Underweight. The firm also reduced the price target for the stock to £4.33 from the previous £5.75.
This adjustment comes as the company has been experiencing a consistent lag in like-for-like (LfL) sales performance compared to the UK retail average and notably behind Tesco (OTC:TSCDY), one of its major competitors.
The analyst at Morgan Stanley pointed out that for the past three quarters, B&M UK's LfL sales have been trending one percentage point below the UK retail average and 500 basis points below that of Tesco's. The firm anticipates this trend of underperformance to persist, attributing the prediction to both pricing and volume factors.
In their analysis, Morgan Stanley raised concerns regarding the sustainability of B&M’s current profit margins. This concern is based on a combination of significant gross margin expansion since before the COVID-19 pandemic and a widening price gap in fast-moving consumer goods (FMCG) compared to long-term historical data.
As a result of these factors, Morgan Stanley has revised its earnings per share (EPS) estimates for B&M downward by 11%, which places their projections 8% below the consensus average over the fiscal years 2025 to 2027. Despite the stock having de-rated by 15% year to date, the firm does not consider the shares to be particularly inexpensive.
According to Morgan Stanley's calculations, the stock is trading at 12.8 times the estimated earnings for fiscal year 2025, which offers limited comfort compared to the UK Retail sector average of 12.2 times and suggests the potential for further de-rating.
InvestingPro Insights
In light of the recent downgrade by Morgan Stanley, investors might be seeking additional perspectives on B&M European Value Retail SA (OTC: BMRRY). According to real-time data from InvestingPro, B&M is trading at a P/E ratio of 12.83, which aligns closely with Morgan Stanley’s estimate, indicating that the stock is not significantly undervalued given the near-term earnings outlook. The company's revenue growth has been positive, with a 10.05% increase over the last twelve months as of Q4 2024, but this must be balanced against the fact that B&M is trading near its 52-week low, reflecting market sentiment and possibly presenting a cautious outlook for investors.
On the upside, B&M pays a noteworthy dividend to shareholders, with a current yield of 3.03%, and has maintained dividend payments for 11 consecutive years. This could be appealing to income-focused investors, especially in the context of a broader market where dividend consistency is highly valued. Additionally, analysts predict the company will be profitable this year, which is supported by B&M's profitability over the last twelve months and a strong return over the last five years.
For those considering a deeper dive into B&M's financial health and future prospects, there are 7 additional InvestingPro Tips available that could provide further guidance. Interested investors can unlock these insights and more with an exclusive offer: use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
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