On Thursday, UBS downgraded Koninklijke Ahold Delhaize NV (AD:NA) (OTC: ADRNY (OTC:ADRNY)) stock, moving the rating from Neutral to Sell and adjusting the price target to €27.00 from the previous €28.00.
The firm's analysis indicates potential underestimation by the market of the downside risks to the company's margins and free cash flow (FCF).
According to UBS, although Ahold Delhaize's "Growing Together" strategy is likely to bolster U.S. growth, the company could face challenges maintaining its profit margins.
UBS's forecasts show the Group's EBIT margin potentially falling below 4% in the fiscal years 2025 and 2026, with estimates 4% to 6% lower than the consensus.
The downgrade is partly based on data suggesting increased competition in the U.S. market, including strong regional operators, discounters, and significant competition from Walmart (NYSE:WMT).
Additionally, Ahold Delhaize's $1 billion in price cuts points to a structurally lower U.S. EBIT margin, projected at around 4.2% versus previous levels above 4.5%. This is within the context of an average 4% Group EBIT margin as the company strives to regain growth.
UBS also notes that Ahold Delhaize's savings from 2019 to 2023 have only partially offset cost inflation, leading to lower EBIT margins.
Furthermore, the firm anticipates that future savings will not fully compensate for the impact of U.S. price reductions, suggesting additional pressure on the company's financial performance.
In other recent news, Ahold Delhaize, the international supermarket conglomerate, has announced a strategic plan to leverage artificial intelligence (AI) and digital capabilities to drive growth.
The company aims to achieve a high-single-digit compound annual growth rate in underlying earnings per share from 2025 to 2028. It also plans to transition loyalty-scheme customers to digital platforms, targeting 30 million monthly active users by 2028.
Simultaneously, Ahold Delhaize's Q1 2024 earnings report showed a modest 0.4% increase in net sales, despite a slight decline in the U.S. market.
The company's European sales rose by 4.6%, offsetting the U.S. decline. Ahold Delhaize remains confident in meeting its financial targets for the year, including a 4% profitability level in Europe by 2025.
These developments are part of Ahold Delhaize's broader strategy to enhance its digital capabilities and customer satisfaction. The company's focus on AI and automation technologies is expected to streamline logistics, distribution, and store operations, leading to cumulative savings of 5 billion euros by 2028.
InvestingPro Insights
As UBS signals caution for Koninklijke Ahold Delhaize NV (OTC: ADRNY), a look at real-time data from InvestingPro provides a broader perspective on the company's financial health. With a market capitalization of approximately $29.45 billion and a P/E ratio standing at 15.02, Ahold Delhaize showcases a valuation that implies a strong free cash flow yield. This aligns with the UBS's focus on the company's free cash flow concerns, albeit from a different viewpoint.
InvestingPro data also reveals a dividend yield of 2.96%, reflecting the company's history of maintaining dividend payments for 18 consecutive years—a testament to its financial consistency. Additionally, the company is recognized as a prominent player in the Consumer Staples Distribution & Retail industry, which could potentially offer stability in turbulent market conditions.
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