Aleksandra Zhilenkova
Jefferies is cautious on the European food and household products sector on the expectation, but thinks Danone (OTCQX:DANOY), Haleon plc (NYSE:HLN), and Henkel AG & Co. KGaA (OTCPK:HENKY) can outperform the group. All three of those stocks were given a Buy rating, despite the tough macroeconomic backdrop. Analyst David Hayes said the firm generally prefers value stocks with operating margin upside or good categories not fully valued, while avoiding names with meaningful reinvestment still needed or priced for perfection.
Jefferies rates Danone (OTCQX:DANOY) over Nestle (OTCPK:NSRGY) in the food sector due to the company's efforts to recoup the dairy margins of its heyday in the 1990s. The work by Danone (OTCQX:DANOY) to narrow the brand focus and start to use brands more strategically was highlighted as being largely done, which is seen setting up the company for rewards in 2024. The multi-year momentum in the China specialized nutrition is also anticipated to continue. "This unit could now also enjoy less volume headwind, boosting growth even higher," advised Hayes. Working in Danone's favor, newborn rates are starting to at least equate with the loss of three-year olds each year from the key 0-3 year-old demographic.
Meanwhile, Haleon (HLN) is Jefferies' preferred name in consumer health, with more predictable and consistent top- and bottom-line delivery anticipated. Looking ahead, Jefferies see a period of more predictable sales evolution for Haleon, and consistent, margin delivery. The company's cash flow is expected to be a positive surprise, and a share buyback is seen as a possibility for the second half of 2024.
Jefferies also thinks the time is coming for Henkel (OTCPK:HENKY) to reap the rewards and efficiencies of the company's substantial reinvestment and rationalization program. Valuation was also noted to be attractive at 15.3X near-term earnings. Positive seen include the company's plans put in place since 2019 to recover the underinvestment for the prior five years, resolving the integration problems of the Sun Products acquisition, and streamlining of consumer operations.