Stifel upgrades Bunzl to “buy,” raises price target to 3,500p

Investing.com -- Stifel has upgraded Bunzl (LON:BNZL) to a “buy” rating from “hold,” citing improving trading trends, a strong balance sheet, and a valuation that remains at a discount compared to historical averages. The brokerage also raised its price target to 3,500p from 3,470p, in a note dated Wednesday.

Bunzl’s full-year 2024 results showed steady growth, with revenues rising 3.1% year-over-year at constant currency to £11.8 billion. 

The second half of the year benefited from improved volume trends and easing deflationary pressures. Adjusted operating profit increased 7.2% to £976.1 million, slightly ahead of expectations, while margins expanded to 8.3%. 

The British distribution and outsourcing company also delivered a 5.5% increase in adjusted EPS, continuing its long-term trend of compounding earnings growth.

For 2025, Bunzl expects modest organic growth of around 1%, supported by an improving pricing environment and recovering volumes. 

Stifel notes that pricing pressures have stabilized and could become more inflationary throughout the year. 

The brokerage believes Bunzl is positioned to benefit from an inflationary backdrop, as plastics and chemical costs, which account for a major portion of its cost of goods sold, are showing signs of inflation. 

The company’s reliance on domestic sourcing—with around 75% of its products sourced locally—should also help mitigate the impact of any new tariffs imposed by a Trump presidency.

Margins remain a key strength for Bunzl, with record-high operating margins of 8.3% in 2024 expected to hold steady in 2025. 

The company continues to optimize its cost structure through warehouse consolidation, digital transformation, and expansion of its own-brand product lines. 

Inflationary pressures remain, particularly in labor costs across the UK and Continental Europe, but Stifel expects these pressures to moderate in the second half of the year.

Bunzl’s balance sheet remains strong, with free cash flow of £633.8 million and leverage at 1.8x at year-end. 

The company spent £883 million on acquisitions in 2024, including the £498 million purchase of Nisbets, and Stifel sees further headroom for additional deals. 

The brokerage forecasts leverage of 1.6x by the end of 2025, leaving around £900 million in acquisition capacity.

Capital deployment remains a key focus, with Bunzl planning to allocate around £700 million per year to M&A and share buybacks through 2027.

The company recently completed a £250 million buyback and has launched another £200 million program for 2025, which Stifel believes will help support the stock.

Despite a 6-month pullback, Bunzl now trades at a one-year forward P/E of 14.5x, representing a 15% discount to its 10-year average. Stifel sees this as an attractive entry point into a defensive, resilient business with improving fundamentals. 

The brokerage values Bunzl using a discounted cash flow model (8% WACC, 2% growth), factoring in potential M&A.