On Tuesday, Deutsche Bank (ETR:DBKGn) adjusted its stance on Associated British Foods (ABF:LN) (OTC: OTC:ASBFY), moving its rating from Hold to Sell. The firm also revised its price target to GBP21.90, a decrease from the previous GBP22.90.
The revision comes as the bank anticipates a reversal in the factors that contributed to the earnings upgrades for the fiscal year 2024, casting a forward-looking shadow into the fiscal year 2025.
The bank's analysis suggests that the recovery in margins for Primark, a retail arm of AB Foods (LON:ABF), may have reached its peak. Concerns were raised due to the absence of like-for-like leverage and the need for increased investment. Additionally, a predicted decline in sugar profitability and a retraction in grocery margin gains underpin the more conservative outlook.
Despite a better consumer outlook and lower bond yields which could be seen as positive indicators, Deutsche Bank believes there are other companies better positioned to capitalize on these trends. This perspective sets them apart, as they issued a Sell rating in contrast to other firms that have not done so.
After the first-half results were published, AB Foods' shares have relinquished some of their earlier gains. Currently, the stock is up just about 5% year-to-date. This performance is modest when compared to competitors Next and Marks & Spencer, which have both seen their shares increase by approximately 25% over the same period.
Deutsche Bank's projections include a 6% decline in earnings per share (EPS) for AB Foods in the fiscal year 2025. Their EPS forecast for that year is also 7% below the consensus, adding weight to their decision to downgrade the stock and lower the price target.
InvestingPro Insights
While Deutsche Bank has taken a bearish stance on Associated British Foods, recent InvestingPro data provides a broader view of the company's financial health. The market capitalization of AB Foods stands at a robust $23.96 billion, and the company is trading at a P/E ratio of 15.89, which adjusts to a slightly more attractive 14.94 when considering the last twelve months as of Q2 2024. This valuation is complemented by a PEG ratio of just 0.25 for the same period, indicating a potential undervaluation relative to expected earnings growth.
Moreover, AB Foods exhibits a solid financial structure, with liquid assets surpassing short-term obligations, and it operates with a moderate level of debt. This financial stability is further underscored by the company's history of profitability, including the last twelve months as of Q2 2024. Additionally, the company has raised its dividend for three consecutive years, although there was a slight dividend growth decline of -3.7% in the last twelve months as of Q2 2024.
InvestingPro Tips highlight that management has been aggressively buying back shares and analysts predict the company will be profitable this year. These actions often reflect confidence in the company's future and may be seen as a positive signal to investors. For those seeking more in-depth analysis, there are over six additional InvestingPro Tips available for AB Foods at https://www.investing.com/pro/ASBFY, which could provide further insights into the company’s investment potential.
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