Source: Investing Published 08/13/2024, 11:22
JP Morgan on Tuesday downgraded Stora Enso OYJ (STERV:FH) (OTC:SEOAY) stock, changing its stance from Overweight to Neutral. The firm also revised its target price for the company’s shares, setting it at €14.00, down from the previous target of €16.10.
The downgrade was prompted by a reassessment of Stora Enso’s operating leverage recovery. Although the company’s packaging volumes returned to normal levels in the second quarter of 2024, the expected improvement in operating leverage did not meet the company’s expectations.
The shortfall was attributed to higher-than-expected costs, which prompted JPMorgan to revise its packaging division’s EBIT estimates by up to 25%.
The new target price of €14.00, while down from the previous target price, still suggests potential upside from the current trading price. However, JPMorgan expressed concerns about the lack of near-term catalysts for the stock, suggesting that Stora Enso could be a value trap for investors at this time.
The JPMorgan analyst highlighted the discrepancy between the recovery in volumes and the weaker-than-expected recovery in operating leverage, which was partly eroded by higher costs. These costs reportedly exceeded what the company’s own cost data indicated, leading to a revision in the company’s financial outlook.
In short, while Stora Enso’s volumes have returned to normal, the expected benefits of operating leverage have not materialized as much as expected, leading to a more cautious outlook from JPMorgan. The company’s revised price target reflects this updated assessment of Stora Enso’s financial performance and near-term investment potential.
In other recent news, Stora Enso OYJ has been gaining attention from analysts. Citi upgraded the stock from Neutral to Buy, highlighting the company’s optimistic outlook for profitability, cash flow and shareholder returns. The firm also noted that Stora Enso’s strategic restructuring and the postponement of major projects could boost cash flow.
Citi’s forecasts showed a more optimistic outlook for Stora Enso’s earnings per share (EPS) for 2024 and 2025, estimating figures that are 50% above the market consensus.
Similarly, Morgan Stanley upgraded Stora Enso from Equal Weight to Overweight. The company’s analysis indicates that Stora Enso’s earnings before interest and taxes (EBIT) could reach €1.3 billion by 2027, up from an estimated €0.7 billion in 2024.
This growth is expected to be driven by a cyclical recovery in commodity prices benefiting the packaging division, a €0.2 billion contribution from a machine conversion at the Oulu facility, and a €0.15 billion cyclical earnings recovery in the wood products division.
These latest developments point to a unique position for Stora Enso, with its expected earnings growth not expected to match any other company in the sector. Both Citi and Morgan Stanley’s upgrades reflect a belief in the company’s ability to capitalize on current market conditions and strategic initiatives.
InvestingPro Insights
Amid the downgrade of Stora Enso by JPMorgan, investors looking for a comprehensive perspective can look to the latest metrics and insights from InvestingPro. Stora Enso has a market cap of $9.27 billion, indicating a significant presence in its industry. Despite the challenges highlighted by JPMorgan, InvestingPro’s advice reveals that Stora Enso’s net income is expected to grow this year, with two analysts revising their earnings upwards for the coming period, suggesting a potential recovery in financial performance. Additionally, Stora Enso’s stock is trading near a 52-week low, which could attract investors looking for potential undervalued opportunities. The company has also demonstrated its commitment to shareholders by maintaining its dividend for 28 consecutive years. However, it is worth noting that the stock is currently trading at a high valuation multiple to EBITDA, and the company has not made a profit over the past twelve months as of Q1 2023.
