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JPMorgan downgrades Stora Enso stock as operating leverage recovery falls short

EditorEmilio Ghigini
Published 13-08-2024, 01:52 pm
SEOAY
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On Tuesday, JPMorgan (NYSE:JPM) issued a downgrade for Stora Enso (OTC:SEOAY) OYJ (STERV:FH) (OTC:SEOAY) stock, shifting its stance from Overweight to Neutral. The firm also adjusted its price target for the company's shares, setting it at €14.00, a decrease 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 (NYSE:PKG) Materials volumes have returned to normal levels in the second quarter of 2024, the expected improvement in operating leverage has not met the firm's forecasts.

This shortfall was attributed to costs increasing more than anticipated, which has led JPMorgan to significantly revise its earnings before interest and taxes (EBIT) estimates for the Packaging Materials division by up to 25%.

The new price target of €14.00, while lower than the previous target, still suggests a potential upside from the current trading price. However, JPMorgan has expressed concerns about the absence of near-term catalysts for the stock, suggesting that Stora Enso may present a value trap for investors at this time.

The analyst from JPMorgan highlighted the discrepancy between the recovery in volumes and the weaker-than-expected recovery in operating leverage, which was partly eroded by rising costs. These costs have reportedly exceeded what the firm's cost data had indicated, leading to the adjustment of the company's financial projections.

In summary, while Stora Enso's volumes have normalized, the anticipated benefits to operating leverage have not materialized to the extent expected, leading to a more cautious outlook from JPMorgan. The firm'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 the subject of favorable analyst attention. Citi upgraded the company's stock from Neutral to Buy, highlighting an optimistic outlook for the company's profitability, cash flow, and shareholder returns. The firm also indicated that Stora Enso's strategic restructuring and the deferral of major projects could bolster cash flow.

Citi's projections showed a more optimistic outlook for Stora Enso's earnings per share (EPS) for the years 2024 and 2025, estimating figures that are 50% higher than the market consensus.

Similarly, Morgan Stanley (NYSE:MS) upgraded Stora Enso from Equalweight to Overweight. The firm's analysis suggests that Stora Enso's earnings before interest and taxes (EBIT) could reach a significant EUR1.3 billion by 2027, up from the estimated EUR0.7 billion in 2024.

This growth is expected to be driven by a cyclical recovery in commodity prices benefiting the packaging division, a EUR0.2 billion contribution from the conversion of a machine at the Oulu facility, and a EUR0.15 billion cyclical earnings recovery in the Wood Products division.

These recent developments indicate a unique position for Stora Enso, as its anticipated earnings growth is not expected to be matched by any other company in the sector. Both Citi and Morgan Stanley's upgrades reflect a belief in the company's capacity to capitalize on current market conditions and strategic initiatives.

InvestingPro Insights

Amid the downgrade of Stora Enso by JPMorgan, investors seeking a comprehensive perspective can consider the latest metrics and insights from InvestingPro. Stora Enso's market capitalization stands at $9.27 billion, indicating a significant presence in its industry. Despite the challenges highlighted by JPMorgan, InvestingPro Tips reveal that net income for Stora Enso is expected to grow this year, with two analysts having revised their earnings upwards for the upcoming period, suggesting a potential rebound in financial performance.

Additionally, Stora Enso's stock is trading near its 52-week low, which may attract investors looking for potentially undervalued opportunities. The company has also demonstrated a commitment to shareholders by maintaining dividend payments for 28 consecutive years. However, it's worth noting that the stock is currently trading at a high EBIT valuation multiple, and the company was not profitable over the last twelve months as of Q1 2023.

For those considering an investment in Stora Enso, InvestingPro offers further insights, with additional tips available to help navigate the complexities of the market. Investors can find more detailed analysis and tips to inform their decisions by visiting https://www.investing.com/pro/SEOAY.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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