* Bullish ABI, IMT & RB; Cautious BN, NESN & UNA
Ahead of our BofAML Global Consumer Conference (16-18th September) we highlight our top 3 European Buy & Underperform ideas – Buys: AB InBev, Imperial Tobacco & Reckitt, and Underperforms: Danone, Nestle, & Unilever. With Staples valuations relatively full (18.4x 2015E P/E) and the consumer outlook still sluggish, we remain most positive on stocks offering either best-in-class EPS growth, self-help and/or re-rating potential. By sub-sector, this leaves us most positive on Tobacco & HPC and Bearish on Large Cap Food. We are Neutral overall on Beverages but we expect material interest in brewer M&A post recent SAB/HEIA news. See valuation analysis p.3-4, comps p.20 & investment cases p.14-19.
* Consumer outlook remains weak, rate rise risks for EM’s…
We expect a generally cautious near term outlook for most regions. In our recent report – tracking the global consumer – we analyse a series of key consumer metrics for the global consumer and conclude that the outlook remains generally subdued. Western European is seeing a gradual recovery but deflationary risks persist, the North American consumer remains soft and the EM very mixed, with Mexico showing a strong rebound but other markets slowing e.g. South East Asia.
In addition we see wider risks for EM exposed stocks (both real and sentiment related) from a possible Fed rate rise – our US economists recently brought forward their estimate of an expected rate rise to June 2015 (from September 2015).
* …Cautious on Large Cap Food; prefer ABF, Kerry & Glanbia…
Against this backdrop we reinstate coverage on Large Cap Food with a cautious stance. Following 6yrs of outperformance driven by accelerating EM growth and improving returns on capital, we believe EPS growth is set to undershoot the market
on a three year horizon as DMs remain slow (deflation, competition in key categories) and EMs subdued. We expect a combination of exposure and strategy to differentiate stock performance, preferring those with secular growth, pricing
power and a transformational element to the story. We reinstate on Nestle and Danone with Underperform ratings and ABF with a Buy rating, favouring its retail expansion story. We also reiterate our Buys on Glanbia & Kerry Group.
* …Prefer HPC & Tobacco and within Beverages, AB InBev
We remain more positive on HPC, Tobacco and selective Beverage names. Reckitt is our top HPC pick given its shift towards higher growth and return categories. Within Tobacco we are most positive on Imperial given improving volumes in its
core W. European business and our estimate of above consensus EPS accretion form its recent US acquisition. We are Neutral on Beverages overall but very bullish on ABI given our estimate of a top end of sector 11% CAGR driven by strong
price/mix and cost saves with upside from Corona revenue synergies. While 2016 looks set to be a tougher year for Brazil beer (macro, world cup comps), we still expect healthy 7% EBIT growth given lower A&P and moderating FX headwinds.