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MORGAN STANLEY: Buy these 26 non-tech stocks primed to profit from the Data Era without the Big Tech price tag

  • Morgan Stanley equity analyst, Matthew Garman, in a new research note provides his list of the top 26 non-technology companies in Europe have a technology edge leveraging the adoption and/or application of new technologies.
  • Garman's suggestions will help investors capitalize on technology advancements without having to pay the  significant premiums for technology stocks.
  • "Although the relative performance of non-tech data era leaders has closely matched relative performance trends of the wider IT sector, the relative PE of the Data Era leaders list is ~10%pt lower than this time last year, and average relative valuations are actually below their five year average," Garman said.
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Morgan Stanley's equity analysts on both sides of the pond have been looking into how investors capitalize on technology advancements without having to pay the significant premium for technology stocks.

In an October 27 research note, Morgan Stanley equity analyst, Matthew Garman provides his list of the top 26 non-technology companies in Europe that have a technology edge leveraging the adoption and/or application of new technologies.

Garman believes these 26 companies either are leaders, or will become leaders, in the data era, building a technology edge that could help close the significant valuation gap between technology stocks and the rest of the market.

"Although the relative performance of non-Tech Data Era leaders has closely matched relative performance trends of the wider IT sector, the relative PE of the Data Era leaders list is ~10%pt lower than this time last year, and average relative valuations are actually below their five year average," Garman said.

The European equity market has often been associated with the financials and energy sector. But in the note, Garman highlights that while those sectors accounted for 25% of the entire MSCI Europe Index by market capitalization, ten years ago. Today, the sectors only account for 10%.

With the stock sector composition changing, this should support a higher valuation for European markets, Garman said. He cites the European recovery fund as having a positive impact on the European market outlook, which in turn will reinforce strong cyclical earnings per share recovery. 

"Over the last 10 years, the SX5E has moved from being a primarily value exposed index, to having a modest tilt towards Quality and Growth," Garman said. " … at 14% Tech is now the biggest sector followed by Industrial Goods and Consumer Products. In fact Banks is just the eighth biggest sector in the index, and tech is three times as important."

For investors who want companies with performance that has moved closely with the relative performance of IT, but with valuations that look less stretched. Here's Garman's list of the 26 non-tech data era leaders in Europe.

1. Boliden

Ticker: BOL

Status: Leader

Industry: Commodities

Price Target: SEK 275

Rating: Equal-weight

Analyst Commentary: "Boliden is at the forefront of digitization and automation in the Metals & Mining industry," said Morgan Stanley equity analyst, Ioannis Masvoulas. "This has enabled the company to deliver significant productivity gains and successfully mitigate the challenges of ageing mines (falling grades, longer hauling distances etc)."

Source: Morgan Stanley

2. Wood Group

Ticker: WG

Status: Likely leader

Industry: Commodities 

Price Target: £3.03

Rating: Overweight

Analyst Commentary: "[Wood Group] renewables business is set to double this year and it has been working with the oil majors on decarbonisation opportunities, including a project with Equinor to modify two offshore platforms to be powered with electricity from floating offshore wind, which will be a first," said Morgan Stanley equity analyst, Amy Sergeant. "It has 30 and 60 years experience in CCUS and hydrogen respectively and is working on some pioneering projects with the OGCI in these areas so we see room for more wins here as the use of these technologies accelerates. With this, we see room for multiple rerating to at least trough multiples around 6.4x ev/ebitda, up from current levels around 5.5x."

Source: Morgan Stanley

3. Cellnex

Ticker: CLNX

Status: Leader

Industry: Communications

Price Target: €70

Rating: Overweight

Analyst Commentary:  "5G will play a core role in the new data era. The roll-out of 5G networks will see European Telcos make heavy investments in spectrum, kit, new sites, fiber (FTTA) and Edge," said Morgan Stanley, equity analyst Emmet Kelly. "With a projected 61K sites, Cellnex is the leading independent European towers company, and has positive exposure to much of this Telco investment."

Source: Morgan Stanley

4. Deutsche Telekom

Ticker: DTE

Status: Leader

Industry: Communications

Price Target:  €20

Rating: Overweight

Analyst Commentary: "5G will be crucial to the next data era," said Morgan Stanley, equity analyst, Emmet Kelly. "We believe DT can use 5G to win meaningful market share across its key geographies. i. 'Going early' in Germany. Telekom claims that it will have 4x more 5G coverage than its nearest competitor Vodafone, by year-end 2020. This should help cement Deutsche Telekom's reputation as Best Network and New Technology Leader."

Source: Morgan Stanley

5. Wolters Kluwer

Ticker: WKL

Status: Leader

Industry: Communications

Price Target: €77

Rating: Overweight

Analyst Commentary: "The shift from information products to expert systems and domain expertise, which embeds Wolters Kluwer products into the clients' workflow, gives them actionable solutions and which are sold by the WK salesforce on a return on investment basis," said Morgan Stanley equity analyst, Patrick Wellington. "Such systems are more vital to clients, have higher retention rates and have greater pricing power (and margin potential at scale). Expert Solutions are now more than 50% of sales and we believe that as more of these businesses reach scale on the top line this will provide a lift to the group margin."

Source: Morgan Stanley

6. Edenred

Ticker: EDEN

Status: Leader

Industry: Consumer Discretionary

Price Target: €44

Rating: Overweight

Analyst Commentary: "A combination of government regulation and consumer demand is shifting these products to a digital environment, and this has been accelerated by Covid, with digital comprising 86% of Edenred's volume in 2020-to-date," said Morgan Stanley equity analyst, Ed Young. "This is leading to increased penetration of the product as it becomes more accessible to new corporates, merchants and consumers and leading to increased growth and an expanding addressable market."

Source: Morgan Stanley

7. Evolution Gaming

Ticker: EVO

Status: Leader

Industry: Consumer Discretionary

Price Target: SEK 680

Rating: Overweight

Analyst Commentary: "Global gambling is still in the infancy of its digital transition, with online representing only 13% of total gambling revenues," said Morgan Stanley equity analyst, Ed Young. "Covid has likely accelerated structural change, and we see Evolution as a uniquely placed winner, as the leading provider of live casino products to operators. Moreover, through its game innovation, both within existing table games and most recently in the creation of its 'gameshow' category, Evolution is expanding the addressable market for online casino."

Source: Morgan Stanley

8. Zalando

Ticker: ZAL

Status: Likely Leader

Industry: Consumer Discretionary

Price Target: €45

Rating: Equal-weight

Analyst Commentary: "We estimate that the "high single-digit" percentage reduction that Zalando reported in its returns rate in Q2 (as a result of the pandemic temporarily changing consumer behaviour) boosted Zalando's profits in the quarter by around €50m – equivalent to 2.5% of the revenues it generated in the period," said Morgan Stanley equity analyst, Geoff Ruddell. "So just think what a permanent 20-30% reduction in Zalando's returns rate would do to the company's EBIT margins if it were able to use 3D scanning technology to solve the problem of customers ordering products that don't fit."

Source: Morgan Stanley

9. L'Oreal

Ticker: OR

Status: Leader

Industry: Consumer Staples

Price Target: €200

Rating: Underweight

Analyst Commentary: "L'Oreal has extended its digital capabilities, growth and leadership vs Staples peers. Perhaps, counterintuitively it has demonstrated the power of 'big brands' online, by in effect shrinking the online shelf and focusing consumer engagement to gain share through the digital channel. Not so much 'infinite shelf' but 'finite shelf'," said Morgan Stanley equity analyst, Richard Taylor.

Source: Morgan Stanley

10. Nestle

Ticker: NESN

Status: Likely Leader

Industry: Consumer Staples

Price Target: CHF 110

Rating: Overweight

Analyst Commentary: "By geography online sales for Nestlé are largely concentrated in the US, UK, France, Germany, China and Japan," said Morgan Stanley, equity analyst Richard Taylor. "As the Giant Digital Leap also gathers pace outside these countries, we expect Nestlé to be an outsized winner due to its structural category exposures, strength of brands and digital capabilities."

Source: Morgan Stanley

11. Ocado

Ticker: OCDO

Status: Leader

Industry: Consumer Staples

Price Target: £17.80

Rating: Equal-weight

Analyst Commentary: "Ocado can offer food retailers a complete solution including front-end web site functionality, supported by Ocado's proprietary 'web shop' and mobile grocery ordering applications; construction of Ocado's automated warehouse; and last-mile routing management technology," said Morgan Stanley equity analyst, Maria-Laura Adurno. "Food retailers can select the services required but the most differentiated element is the warehousing technology."

Source: Morgan Stanley

12. Credit Suisse

Ticker: CSGN

Status: Likely Leader

Industry: Financials

Price Target: CHF 13

Rating: Overweight

Analyst Commentary: "Credit Suisse has been on the front-foot in accelerating its digitalization drive, especially in its Swiss Universal Bank (SUB), where it launched direct banking in Sep- 2019, an online platform to optimally serve clients with digital basic banking products, handling ~1 million retail and 60k commercial clients," said Morgan Stanley equity analyst, Magdalena Stoklosa. "To further expedite the digital market share gains, the bank launched its holistic digital products suite called "CSX" and "CSX Young" in October-20, a direct competition to current challenger banks in the market."

Source: Morgan Stanley

13. Hargreaves Lansdown

Ticker: HL

Status: Leader

Industry: Financials

Price Target: £14.30

Rating: Underweight

Analyst Commentary: "The D2C Investment Platform industry has seen strong growth in recent years supported by structural drivers such as the Advice and Savings Gap, an ageing population and intergenerational wealth transfer," said Morgan Stanley equity analyst, Shamoli Ravishanker. "We believe Covid-19 will accelerate the trends of digitalisation and online investing (See recent note) and technology will be one of the key factors differentiating the leaders from the laggards. Hargreaves has been a market leader in the industry (~40% market share) with its own proprietary technology platform having set it apart from industry peers."

Source: Morgan Stanley

14. KBC

Ticker: KBC

Status: Leader

Industry: Financials

Price Target: €62

Rating: Overweight

Analyst Commentary: "To quote KBC's CEO at our 14th European Financials Conference: 'Transforming only the front end is like 'putting lipstick on a bulldog' – addressing the back-end is key'," said Morgan Stanley equity analyst, Giulia Aurora Miotto. "KBC has been ahead of peers in re-thinking its IT infrastructure and digital offering, and this has resulted, amongst other things, in better cost flexibility: for example, the bank was one of the first to be able to deliver a meaningful cost cut (from costs +1.6% in 2020 to -3.5%) as it leveraged more the digital infrastructure once Covid hit in March 2020."

Source: Morgan Stanley

15. Roche

Ticker: RO

Status: Likely Leader

Industry: Healthcare

Price Target: CHF 372

Rating: Overweight

Analyst Commentary: "The marriage of biotechnology and diagnostics provides personalised healthcare solutions, from collecting patient data in real-time to empowering health decisions through digital services to using artificial intelligence and robotics to increase quality, lower costs and accelerate speed to market," said Morgan Stanley, equity analyst Mark Purcell. "The net result is that Roche is recognised as one of the highest-quality companies in European biopharma and a true 'innovation leader', with over 30 novel medicines in late-stage clinical development."

Source: Morgan Stanley

16. Terveystalo

Ticker: TTALO

Status: Leader

Industry: Healthcare

Price Target: €11.70

Rating: Equal-weight

Analyst Commentary: "Access to healthcare professionals is a significant challenge facing consumers and healthcare operators across the world," said Morgan Stanley equity analyst, Alex Gibson. "Terveystalo is years ahead of peers in the development of a technology platform that facilitates telehealth and democratizes healthcare access. Having built the platform from the ground up in 2010 using proprietary software, the company now has an advantage from a infrastructure and data point of view, while as the platform has scaled, Terveystalo's profitability has increased.'

Source: Morgan Stanley

17. Epiroc

Ticker: EPI-A

Status: Likley Leader

Industry: Industrials

Price Target: SEK 122

Rating: Equal-weight

Analyst Commentary: "Epiroc is developing a fleet of battery powered electric vehicle fleet for underground mining applications as well as 5G wifi connectivity products in partnership with Ericsson for remote connectivity in underground mining," said Morgan Stanley equity analyst, Robert Davies. "As the mining industry continues its focus on productivity, safety and environmental issues, Epiroc should be well placed from a broad portfolio of vehicles that will be applicable in underground sites, could remove the need for polluting diesel based engines and be controlled remotely, thus removing operators from harm's way."

Source: Morgan Stanley

18. Experian

Ticker: EXPN

Status: Likely Leader

Industry: Industrials

Price Target: £33.30

Rating: Overweight

Analyst Commentary: "Experian holds large amounts of consumer and business data. Worldwide it holds information on 1.3bn consumers and >163m businesses," said Morgan Stanley equity analyst, Anvesh Agrawal. "More importantly, this data has optionality across industries and is not restricted just to financial services. Experian holds these assets by virtue of being a credit bureau, which is a regulated industry, with high barriers to entry."

Source: Morgan Stanley

19. Ferrovial

Ticker: FER

Status: Leader

Industry: Industrials

Price Target: €31

Rating: Overweight

Analyst Commentary: "Via the ownership of 407-ETR, the free-flow highway in Toronto, Canada, which launched in 1999, Ferrovial has been able to build early an unrivalled expertise in managing urban toll roads, which leverage technology in multiple ways: (i) free-flow tolling technology to lower opex overall vs. toll plazas; (ii) plate-reading technologies to lower % of unbillable users and maximise revenues / lower claims costs; (iii) big data to optimise tariffs grids (toll allocation model + multi-year pricing model), maximise usage (find competitive advantage vs. alternative roads and bill accordingly; better understand individual customers' habits to boost frequency of usage) and drive dynamic pricing (trial-and-testing of elasticity of traffic demand to pricing); (iv) app for customers to manage bills instantly / improve customers' information on traffic conditions," said Morgan Stanley equity analyst, Nicolas Mora.

Source: Morgan Stanley

20. Renishaw

Ticker: RSW

Status: Leader

Industry: Industrials

Price Target: £25.00

Rating: Equal-weight

Analyst Commentary: "Renishaw has a portfolio of co-ordinates measuring machines, gauging systems, fixtures, machine calibration, styli & machine tool probes that help manufacturers to maximise production output, to reduce significantly the time taken to produce and inspect components, and to keep machines running reliably," said Morgan Stanley equity analyst, Robert Davies.

Source: Morgan Stanley

21. Schneider

Ticker: SU

Status: Leader

Industry: Industrials

Price Target: €107

Rating: Equal-weight

Analyst Commentary: "Schneider is a leading player globally in Industrial Automation (around a Top 3 position), generating €6.3bn in revenues last year (23% of group) and 18% EBIT margins," said Morgan Stanley equity analyst, Ben Uglow.

Source: Morgan Stanley

22. Siemens

Ticker: SIE

Status: Leader

Industry: Industrials

Price Target: €120

Rating: Equal-weight

Analyst Commentary: "Siemens is the #1 supplier of Automation and Motion Control products worldwide (it has a #3 position in Process markets also) and spends >€1.6bn on R&D in Digital Industries each year," said Morgan Stanley equity analyst, Ben Uglow. "Siemens is changing its business model to fully monetize the Data Era opportunity. It partially separated its healthcare operations in 2018 and deconsolidated its Gas & Power business (Siemens Energy) in September 2020, thereby leaving its Automation and Software operations ('Digital Industries') accounting for more than ~60% of the residual value. The revenue will be increasingly driven by investment in industrial automation."

Source: Morgan Stanley

23. Teleperformance

Ticker: TEP

Status: Likely Leader

Industry: Industrials

Price Target: €320

Rating: Overweight

Analyst Commentary: "Due to the fact that Teleperformance designs process automation solutions, but critically also installs, maintains and upgrades these back-office tools for its clients the growth is set to outstrip that of any pure-play customer service peers in the market," said Morgan Stanley equity analyst, Edward Stanley.

Source: Morgan Stanley

24. ENEL

Ticker: ENEL

Status: Leader

Industry: Utilities

Price Target: €9

Rating: Overweight

Analyst Commentary: "Enel is changing the relationship with its customers by developing single credentials with interaction only through digital channels," said Morgan Stanley equity analyst, Robert Pulleyn. "Today Enel has 100% remote operational management and monitoring of renewable and conventional generation assets and operates smart metering systems on its networks."

Source: Morgan Stanley

25. Iberdrola

Ticker: IBE

Status: Leader

Industry: Utilities

Price Target: €11.30

Rating: Equal-weight

Analyst Commentary: "The company has adopted a wide range of digital solutions supporting its operations across all divisions. Iberdrola has implemented smart metering programs both in its retail business through its Smart Home application as well as adopted mobility solutions for network assets," said Morgan Stanley equity analyst, Robert Pulleyn

Source: Morgan Stanley

26. Oersted

Ticker: ORSTED

Status: Leader

Industry: Utilities

Price Target:  DKK 950

Rating: Equal-weight

Analyst Commentary: "Through the pandemic, Orsted's IT infrastructure and digitalization programmes were capable of supporting remote working for a large number of employees. Being able to operate all windfarms remotely, the company was able to ensure a fully operational asset base at normal availability rates even during strict lockdown," said Morgan Stanley equity analyst, Robert Pulleyn.

Source: Morgan Stanley

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