It's not just the US that does catchy group names. The "Magnificent Seven" is made up exclusively of US tech stocks, but Europe's GRANOLAS offer their own benefits through smaller market caps, diversification, profitability, and, on average, cheaper valuations.
In 2020, investment bank Goldman Sachs released its first iteration of the GRANOLAS, an acronym for the following:
• GSK (GSK)
• Roche (ROG)
• ASML (ASML)
• Nestle (NESN)
• Novartis (NOVN)
• Novo Nordisk (NOVO B)
• L'Oreal (OR)
• LVMH (MC)
• AstraZeneca (AZN)
• SAP (SAP)
• Sanofi (SAN)
As these companies report their Q2 and half-year results, Morningstar analysts will be updating their assessments of how attractive each share is to investors.
Nestle: Growth Falls Short, Fair Value Trimmed
• Fair Value Estimate: CHF 105.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low
Analyst: Ioannis Pontikis
Nestle (NESN) reported half-year fiscal 2024 results on July 25 that included organic growth of 2.1%. This was below the company-compiled consensus estimate of 2.5%, driven predominantly by worse-than-expected pricing (positive 2% versus positive 3% for consensus). The underlying 17.4% trading operating margin was ahead of the 17.2% consensus expectation. Share price reaction was negative after the release (down around 4% at the time of writing), which was likely triggered by lower-than-expected fiscal 2024 organic growth guidance (more than 3% versus around 4% before and 2.8% in our updated model), which in turn was the result of weak pricing trends and a modest RIG recovery.
We continue to be constructive on Nestle as our long-term forecasts for the business are unchanged, however, our short-term outlook looks less attractive given weak elasticities and a challenging pricing environment with consumers trading down across categories. We trim our fair value estimates for Nestle to CHF 105/$120 from CHF 109/$124 before to account for lower 2024 organic growth guidance and currency movements.
AstraZeneca: Steady Outlook but Growth Could Slow
• Fair Value Estimate: £124.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
Analyst: Damien Conover
Releasing earnings on July 25, AstraZeneca (AZN) reported that total sales increased 17% operationally over the past quarter. However, we expect growth will decelerate as generic pressures increase on some of its drugs. On the positive side, the cancer division continues to post strong gains (up 19%). New indications and recent drug launches in the group should continue to drive steady gains. However, we are increasingly concerned about the competitive threat from Johnson & Johnson’s Rybrevant/Lazertinib combination against Astra’s largest cancer drug Tagrisso in lung cancer. Nevertheless, Astra holds a diverse portfolio of cancer drugs that should support long-term growth and reinforce its wide moat.
We are holding steady to our GBX £124/$78 fair value estimates (local/ADR) for AstraZeneca following second-quarter results that were largely in line with our expectations. However, the higher operating expenses in the quarter are likely weighing on shares, as the market was potentially expecting better operating margins. We expect margin improvement over the next three years as the firm leverages several recent product launches. If Astra can achieve the long-term sales guidance, there is significant upside to our fair value.
Roche: Wide Moat, Shares Undervalued
• Fair Value Estimate: CHF 379.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low
Analyst: Karen Anderson
Roche (ROG) also reported second quarter earnings on July 25. We're maintaining our CHF 379/$55 fair value estimate following strong top- and bottom-line growth in the second quarter, as the firm's newer launches and above-market diagnostics growth are finally shining through as covid headwinds fade.
In pharma, we think Roche has in-licensed a string of promising drug candidates in cardiometabolic settings and in immunology, and additional bolt-on acquisitions could help support the firm's already full late-stage pipeline in oncology and neurology. In diagnostics, we think the firm's core business is performing strongly, but we're also looking forward to this year's launch of an automated mass spectroscopy platform as well as midterm potential for a differentiated next-generation sequencing product. We think Roche's drug portfolio and pipeline and leading diagnostics business continue to support a wide moat.
Sanofi: Solid Position for Long-Term Growth
• Fair Value Estimate: €113.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
Analyst: Damien Conover
In its Q2 earnings report released 25 July, Sanofi’s (SAN) net sales increased 10% operationally, led by immunology drug Dupixent (up 29%), which accounts for over 30% of Sanofi’s net sales. Further, several recent launches continue to gain traction, including hemophilia drug Altuviiio, which we expect will post annual sales over €1 billion by 2027. On the consumer division divestment, plans remain on track to shed the business with several exit options available, but we expect a spinoff of the business unit.
We are holding steady to our fair value estimates of $61/EUR 113 for Sanofi following slightly better-than-expected second-quarter earnings. We continue to view the stock as undervalued, with the market not fully appreciating the growth potential of the firm’s portfolio of drugs that also supports a wide moat.
Novartis: Diverse Drug Portfolio with a Strong Cash Flow Pipeline
• Fair Value Estimate: CHF 96.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
Analyst: Damien Conover
Novartis' (NOVN) earnings, released on July 18, beat analyst expectations with operational sales growing 11% and sales of key drug Entresto up 28%. The company's share price however fell slightly, but overall, Novartis is still up 17% this year.
We are holding steady to our $105/CHF 96 fair value estimate (ADR/local share class) following solid second-quarter results that, although slightly ahead of our projections, were not enough to move the valuation. We believe the market is appropriately valuing the stock, with a balanced view of the strength of the pipeline offsetting patent losses, setting up moderate growth over the next three years while also supporting a wide moat over the long term.
LVMH: Growth to Slow, Fair Value Maintained
• Fair Value Estimate: €670.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
Analyst: Jelena Sokolova
LVMH's (MC) share price fell 4% when the company published its half year earnings on July 23. The luxury sector is facing weakening demand with the less affluent developed market consumers being particularly hit. However, sales to Chinese nationals is up about 10% and Morningstar argues that demand in the country has pent-up upside potential. Sales for the group increased 3% in local currencies (and were down with a 4% currency headwind). Sales for its most profitable and largest division, fashion and leather goods, came at 2%. Revenue growth for fashion and leather goods was price-driven, with mix and volumes largely offsetting each other.
We are maintaining our fair value estimate of €670 for wide-moat LVMH as the company reported an expected slowdown in growth trends in the first quarter. We view shares as modestly overvalued at current levels.
ASML: Shares Hit by US Restriction Concerns
• Fair Value Estimate: €900.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
Analyst: Javier Correonero
ASML (ASML) reported sales and gross margins slightly above guidance in Q2, at €6.24 billion and 51.5%, respectively. The company reported on July 17 while simultaneously, reports of potential US restrictions on chip sales to China broke, and the company's (and other semiconductor companies') share price fell. ASML reiterated its long-term guidance, which will be updated in the November capital markets day. Our long-term forecasts are at the high end of management's 2030 guidance.
Although we don't discard incremental trade restrictions for ASML, a heavy crackdown is not our base case, and we are maintaining our €900 fair value estimate. Even if more ASML systems are targeted, we expect China will continue ordering nonrestricted DUV machines at high levels and exploit any loopholes in the supply chain. If the US wants to effectively curb China's advancements, it would also need to focus on other technologies beyond lithography such as advanced packaging, deposition or etching equipment, among others.
SAP: Fair Value Hiked, Customer Retention Risk
• Fair Value Estimate: €141.00
• Morningstar Rating: ★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium
Analyst: Julie Sharma
SAP (SAP) reported a solid second quarter on July 22, with broad-based growth and cloud revenue continuing to increase forcefully. Total revenue in the quarter was €8.3 billion, marking a 10% year-over-year increase in constant currency. The firm stressed that 60% of its RISE with SAP customers were net new. However, we continue to view this stat as a risk, as it implies a substantial base of existing customers that could churn off SAP when moving to the cloud.
With earnings, SAP's roadmap for margin expansion showed more promise with detailed internal artificial intelligence directives and commentary on streamlining their digital marketing. As a result, this increased our fair value estimate to €141 per share from €132. We have moderately raised our midcycle operating margin assumptions based on a more precise roadmap for operational efficiencies. Despite our fair value adjustments, we view the stock as overvalued – as we believe SAP's ERP market share will continue to decline due to fiercer competition from the likes of Workday.
This article will be updated as fresh earnings results arrive.
