Sodexo stock upgraded by Morgan Stanley on potential 10% market cap boost

On Friday, Morgan Stanley (NYSE: MS ) raised its outlook on Sodexo (EPA: EXHO ) (SW:FP) (OTC: SDXAY) stock, shifting the rating from Equalweight to Overweight and increasing the price target to €96 from €86.

The adjustment comes amid expectations that simplifying the company’s holding structure could potentially increase its market capitalization by approximately 10%.

This structural change, combined with a positive survey on the company's U.S. catering operations, has provided Morgan Stanley with a brighter perspective on the stock's future.

The firm's confidence in Sodexo's operational turnaround in the United States has been bolstered by recent survey results. This optimism is reflected in the revised price target, which now accounts for the potential benefits of the company's strategic adjustments.

Furthermore, Morgan Stanley's analysis suggests that the evolving revenue mix, with growing contributions from Group Purchasing Organizations (GPO), vending, and U.S. operations, alongside a reduction in Facilities Management (FM) revenues, could enhance margins by approximately 80 basis points. Sodexo's previous high exposure to FM and lower presence in the U.S. market had been areas of concern for analysts.

However, the current developments, including the anticipated margin boost and the sustainable turnaround in the U.S., have contributed to the more favorable assessment of the stock's risk-reward ratio. These factors have been instrumental in Morgan Stanley's decision to upgrade the stock to Overweight.

The firm's revised price target of €96 reflects not only the expected increase in market cap but also the potential margin improvements and the sustainable nature of Sodexo's U.S. operations.

The upgrade suggests that Morgan Stanley sees a more attractive investment profile for Sodexo, with the operational and structural changes providing a solid foundation for future growth.

InvestingPro Insights

As Morgan Stanley upgrades Sodexo's outlook, real-time data from InvestingPro aligns with the positive sentiment. With a market capitalization of $13.53 billion and a forward P/E ratio that has adjusted to a more attractive 17.28, Sodexo's valuation metrics suggest that the market is recognizing the company's growth potential. Additionally, the company's revenue growth of 7.3% over the last twelve months as of Q2 2024, coupled with a gross profit margin of 12.01%, underscores the operational efficiency gains highlighted by Morgan Stanley.

InvestingPro Tips further enrich our understanding of Sodexo's position. The company's high shareholder yield and consistent dividend payments for 22 consecutive years demonstrate a commitment to returning value to investors. Also, Sodexo's role as a prominent player in the Hotels, Restaurants & Leisure industry, combined with analysts' predictions of profitability this year, provides a strong investment narrative. For those interested in a deeper dive, InvestingPro offers additional tips on Sodexo, and by using the coupon code PRONEWS24, readers can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking access to a total of 7 InvestingPro Tips for this company.

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