RBC upgrades Bunzl stock, highlighting growth in value-added products and M&A

On Thursday, Bunzl (OTC:BZLFY) Plc. (BNZL:LN) (OTC: BZLFY) received an upgrade in stock rating from RBC Capital. The firm shifted its stance on the stock from Underperform to Sector Perform, while also increasing the price target from GBP27.00 to GBP33.50. The upgrade reflects a series of revised assumptions by the analyst at RBC Capital.

The analyst's decision to raise the price target is based on several factors. These include expectations of higher terminal margins due to a shift towards more own-label and value-added products in new verticals.

Additionally, RBC Capital anticipates Bunzl will increase its annual mergers and acquisitions (M&A) spend to approximately £500 million per annum, recognizing a more diverse M&A pipeline.

The value of future M&A activity is now considered to account for 28% of the revised price target set by RBC Capital. The analyst also cites an increase in near-term free cash flow (FCF) following upgrades driven by margin improvement.

The new price target implies a forward price-to-earnings (P/E) ratio of 16.1x for the fiscal year 2025, which is slightly above the 20-year average P/E ratio of around 15.6x.

RBC Capital's upgrade suggests a more optimistic outlook for Bunzl, acknowledging the company's potential for growth and stability. The analyst described Bunzl as a 'sleep tight at night' stock for long-term investors, indicating confidence in the company's steady performance. Despite the upgrade, the analyst noted a preference for DCC and RS1 within the business-to-business (B2B) distribution sub-sector.

In other recent news, Bunzl Plc has been in the spotlight with several financial firms adjusting their outlook on the multinational distribution company. CFRA maintained its Hold rating on Bunzl, raising the price target to £35.00, following the company's slight revenue dip of 3.3% year-over-year.

Despite this, Bunzl's management improved its adjusted operating margin to 8.0% and declared an interim dividend of £0.201, a 10.4% increase from the previous year.

HSBC analyst Matthew Lloyd upgraded Bunzl's stock from "Hold" to "Buy", citing the company's solid growth and effective M&A strategy. The new price target set by HSBC is GBP34.60, an increase from the previous GBP32.55.

On the other hand, RBC Capital increased its price target for Bunzl from GBP26.00 to GBP27.00, maintaining an Underperform rating. The adjustment comes after Bunzl's recent M&A activities and updated guidance in its second-quarter trading update.

However, RBC Capital expressed caution about Bunzl's prospects due to its heavy exposure to the business-to-business-to-consumer sector and current macroeconomic conditions. These are the recent developments surrounding Bunzl Plc.

InvestingPro Insights

Following the recent stock rating upgrade for Bunzl Plc (BZLFY) by RBC Capital, data from InvestingPro provides additional insights into the company's financial health and market performance. With a market capitalization of $15.58 billion and a Price/Earnings (P/E) ratio of 24.01, Bunzl trades at a premium compared to the industry average. This premium valuation is supported by the company's track record of raising its dividend for 18 consecutive years, signaling confidence in its financial stability and commitment to shareholder returns.

InvestingPro also highlights the stock's significant return over the last week, with a 9.12% price total return, and a robust 21.88% return over the last three months. These figures underscore the stock's recent positive momentum, which may attract investors seeking capital appreciation. Additionally, Bunzl's moderate level of debt allows for financial flexibility, which could be advantageous for the company's planned increase in M&A activity.

For investors interested in further insights, there are additional InvestingPro Tips available, including analysis on the stock's trading patterns and future profitability predictions. These tips can be explored in detail at InvestingPro's dedicated section for Bunzl Plc (https://www.investing.com/pro/BZLFY).

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