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Morgan Stanley predicted that European companies will beat market expectations for first-quarter earnings, citing the better-than-expected macro figures of the last few months. But the Wall Street bank also expects weakness due to several factors, such as a slowing economy, headwinds from a strengthening Euro, and the contraction of profit margins in the second half of this year. Strategists at the bank warned that these factors could lead to downgrades later in the year, alongside a 10% fall in full-year earnings per share. The investment bank also found that the leisure, retailing, and building and construction sectors are more likely to beat than miss expectations in their first-quarter earnings reports. “Better-than-expected macro newsflow over the last few months suggests that European companies will provide another solid beat for 1Q results and we doubt company management teams will be concerned enough yet to guide full-year estimates lower either,” said Morgan Stanley strategists led by Giorgio Magagnotti in a research note to clients on Apr. 3. The table below shows five stocks highlighted by Morgan Stanley, where its analysts have a “high conviction” in results. The Wall Street bank holds “positive views” on French paint maker Saint-Gobain and on one of the world’s largest reinsurers, SCOR . The list also includes pan-European hotel operators Whitbread and Accor , along with hotel-servicing firm Elis. The investment bank said Saint-Gobain isn’t expected to beat market expectations when it reports first-quarter results on Apr. 27 since that period is typically the slowest for the construction sector. However, the Wall Street bank’s analysts think the focus will be on the company’s full-year guidance. “We think Saint-Gobain’s one-stop-shop offering and solutions-driven approach will support pricing resiliency in a deflationary energy cost environment,” said Morgan Stanley analysts, who project the company’s shares will rally by 48% over the next 12 months to 76 euros ($83). “Q1 is only a revenue release, no earnings, yet we think it will prove a positive catalyst for shares with the business continuing to outperform underlying market growth.” Morgan Stanley is also bullish toward London-listed Whitbread ahead of its full-year results on Apr. 25. The investment bank expects the hotel operator to beat market expectations on profit before tax and cash return, also anticipating an “upbeat assessment” from the new CEO Dominic Paul. “Whitbread’s asset backing provides a good inflation hedge, and the shares are trading at its updated property valuation, leaving the operations for free,” the analysts wrote. “We are expecting a cash return and see the FY23 results as the main upcoming catalyst.”
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