Bunzl stock upgraded by JPMorgan, cites margin growth and own-brand strength

On Monday, Bunzl (OTC:BZLFY) Plc. (BNZL:LN) (OTC: BZLFY) stock, a global distribution and outsourcing company, received an upgraded rating from JPMorgan from Neutral to Overweight. Alongside the upgrade, the firm also raised its price target for Bunzl's shares to GBP39.80, an increase from the previous target of GBP36.60.

The upgrade reflects JPMorgan's increased confidence in Bunzl's medium-term margin outlook. According to the firm, this confidence is based on a positive trajectory observed in the company's margins, which have been structurally higher than in the past.

JPMorgan first issued a Neutral rating for Bunzl in March, acknowledging the company's fundamental attractiveness and higher margins compared to five years prior. However, the firm had concerns about potential negative impacts from inflation and sustained lower volumes.

Bunzl's first half of 2024 financial update was a turning point for JPMorgan's assessment, revealing significant improvements 'under the hood' in terms of the company's margins, as well as a clear capital allocation policy. These developments contributed to the decision to upgrade the stock rating.

The key factor influencing JPMorgan's optimistic outlook is the potential margin upside in North America, where Bunzl has been increasing its own brand penetration within the Grocery and Foodservice sectors, which account for 40% of the Group's revenue.

This strategic move has led to a mid-single-digit percentage upside to the Group's earnings before interest, taxes, and amortization (EBITA), as Bunzl has secured manufacturing lines with suppliers over the past year.

In other recent news, Bunzl Plc's earnings per share forecasts have been upgraded by Deutsche Bank due to improved guidance. The company is also anticipated to return to organic sales growth by the end of the year, bolstered by a robust pipeline of acquisitions and diminishing deflationary pressures.

Despite a 5% decline in sales growth in the first half of 2024, Bunzl is expected to resume its long-term trend of approximately 2.5% annual growth from fiscal year 2025 onwards.

Bunzl has also been the focus of several financial firms adjusting their outlook. RBC Capital upgraded its rating on Bunzl stock from Underperform to Sector Perform, citing expected growth in value-added products and increased mergers and acquisitions activity.

In contrast, CFRA maintained its Hold rating on Bunzl, despite a slight revenue dip of 3.3% year-over-year, while raising the price target to £35.00.

HSBC analyst Matthew Lloyd upgraded Bunzl's stock from "Hold" to "Buy", highlighting the company's solid growth and effective M&A strategy. The new stock price target set by HSBC is GBP34.60, an increase from the previous GBP32.55. These are recent developments surrounding Bunzl Plc, a multinational distribution company.

InvestingPro Insights

To complement JPMorgan's upgraded outlook on Bunzl Plc, recent data from InvestingPro provides additional context to the company's financial health and market performance. Bunzl's market capitalization stands at $15.12 billion, reflecting its significant presence in the distribution and outsourcing sector. The company's P/E ratio of 23.74 suggests that investors are willing to pay a premium for its shares, possibly due to the positive margin outlook highlighted by JPMorgan.

InvestingPro Tips reveal that Bunzl has maintained dividend payments for an impressive 45 consecutive years, with 18 years of consecutive dividend increases. This track record of consistent shareholder returns aligns with JPMorgan's observation of a clear capital allocation policy. Additionally, the company operates with a moderate level of debt, which could provide financial flexibility as it pursues margin improvements in North America.

The company's revenue for the last twelve months as of Q2 2024 was $14.67 billion, with a gross profit margin of 27.63%. This robust gross margin supports JPMorgan's assessment of structurally higher margins compared to historical levels. Bunzl's operating income margin of 7.1% further underscores the company's ability to maintain profitability in a challenging economic environment.

For investors seeking more comprehensive analysis, InvestingPro offers additional tips and metrics that could provide deeper insights into Bunzl's financial position and growth prospects.

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