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Investing.com -- Morgan Stanley (NYSE:MS) downgraded E.ON SE (ETR:EONGn) to Equal Weight from Overweight following a sharp rally in the European energy networks operator’s shares this year.
The stock has gained 41% year-to-date (YTD), making it the second-best performer within Morgan Stanley’s European utilities coverage.
Despite the continued appeal of E.ON as a portfolio anchor, the bank sees better opportunities for new investors elsewhere.
The bank maintained its €18 price target but believes that the strong rerating limits further upside. At a 2027e price-to-earnings (P/E) multiple of 12.5, the stock now trades in line with peers.
“Valuation is neither demanding nor super-attractive and looks close to fair vs. growth & risks levels,” the analysts led by Robert Pulleyn wrote in a Monday note.
They believe that E.ON’s compelling structural outlook—driven by growth of more than 10% in its regulated asset base (RAB) and a projected earnings per share (EPS) compound annual growth rate (CAGR) of 6% from 2024 to 2030—remains intact.
Including an average dividend yield of around 4%, total shareholder return is estimated at more than 10% annually.
However, these positives are now seen as largely priced in, and the analysts note that the stock has become a “consensual position, with >60% of 23 sell-side ratings on buy.”
The team also pointed out that the DAX index rally and the launch of the German federal infrastructure fund have likely improved sentiment around E.ON, though the fund provides only very limited direct benefits to the company in the near to medium term.
Following its YTD rally, E.ON’s valuation is now seen as “less attractive,” implying a 27% premium for its RAB at current levels. This, while in line with peers, is “paired with less growth and more retail than elsewhere,” analysts said.
While the downgrade reflects short-term valuation constraints, Morgan Stanley still views E.ON as a quality compounder with potential upside over time—particularly if regulatory reforms in Germany allow for higher capex or dividend flexibility.
But for now, “we see better risk/reward elsewhere for incremental buyers," the analysts said.
Specifically, they see alternative ways to gain exposure to German networks, notably through Elia (EBR:ELI), or through electric network operators trading at lower valuation multiples, such as SSE (LON:SSE) and National Grid (LON:NG).