Danone upgraded, Nestlé downgraded by Morgan Stanley

Investing.com -- Morgan Stanley (NYSE:MS) in a note dated Friday has revised its ratings for two major food producers, upgrading Danone (EPA:DANO) to “overweight” from “equal-weight,” and downgrading Nestlé to “underweight” from ‘equal-weight.”  

The financial institution cites several reasons for its positive outlook on Danone. Danone’s portfolio, with approximately 90% considered "healthy," aligns well with current consumer trends focused on gut health, high protein, and GLP-1s. 

Analysts at Morgan Stanley predict a 4% organic sales growth for Danone over the 2025-2027 period. 

The company’s potential for margin expansion, driven by operating leverage and efficiency improvements, is also noted as a positive factor. 

Additionally, Danone’s strong free cash flow and low leverage provide opportunities for inorganic earnings growth.  

Morgan Stanley also flags Danone’s reduced exposure to US economic concerns compared to Nestlé. 

With only 21% of its revenue derived from the US, Danone is considered less vulnerable to potential impacts from weakening consumer sentiment and tariffs.  

Conversely, Morgan Stanley has downgraded Nestlé due to concerns about its valuation and growth prospects. 

The brokerage argues that Nestlé’s valuation is stretched, trading at a premium to the sector despite being in the early stages of a turnaround. 

There are also worries about the company’s exposure to the US consumer and the potential impact of tariffs on its Nespresso business.  

Analysts at Morgan Stanley express concern over Nestlé’s free cash flow conversion, which they describe as poor in comparison to its peers, and barely sufficient to cover the company’s dividend. 

This, according to the analysts, limits Nestlé’s capacity for debt reduction and cash returns.  

Morgan Stanley also discusses the broader context of the European Food Producers sector. 

The sector is expected to benefit from a rotation into defensive stocks, as macroeconomic conditions in the U.S. weaken. 

However, the analysts suggests that European Food Producers are not entirely immune to consumer pressures

Shares of Danone were up 2%, while Nestle (NSE:NEST) traded lower at 0.7% at 06:04 ET (10:04 GMT).