Morgan Stanley ranks the FanDuel, Paddy Power and PokerStars business Flutter its most preferred overall based on the potential upside for shares of 22% to 16,200p.
The next in line is European hotels chain Accor SA (EURONEXT:AC), followed by Premier Inn owner Whitbread with a price target uplift of 18% to 4,200p and caterer Compass up 8% to 2,300p.
While Morgan Stanley favours gambling, hotels and catering in the year ahead, it is more cautious on cruises and has ranked FTSE 250-listed Carnival (LSE:CCL) one of its bottom picks.
Shares in dual-listed Carnival are up 75% in the past year but the bank said pricing and other operating metrics still lag peers and the company remains “very sensitive” to movements in revenue yield and oil price.
The bank’s 2024 outlook note also places Ladbrokes owner Entain (LSE:ENT), travel firms easyJet (LSE:EZJ) and Jet2 Ordinary Shares (LSE:JET2) and the food-on-the-move firm SSP Group (LSE:SSPG) among its selection of “overweight” stocks.
It is “equal weight” on British Airways owner International Consolidated Airlines Group SA (LSE:IAG), as well as the FTSE 250-listed grouping of TUI AG (LSE:TUI), Mitchells & Butlers (LSE:MAB), Wetherspoon (J D) (LSE:JDW), Playtech (LSE:PTEC) and Wizz Air Holdings (LSE:WIZZ).
Morgan Stanley said support for Flutter is built on clear leadership positions in the US, UK and Australia, as well as strength in promising and fast-growing markets such as Italy and India.
Over 2024 and into 2025, it expects Flutter to deliver strong US profitability and for this to transform the geographic and financial profile of the group.
A rapid fall in debt leverage as US profitability develops means the bank sees capacity for M&A and for Flutter to return 14-27% of its market capitalisation to shareholders over 2024-25.
Potential risks to its investment case include regulation and a second wave of competition from the likes of ESPN Bet or Bet365.
It said: “While we think Flutter (and DraftKings) are well placed to cope with this threat, given material and compounding scale advantages, there is risk at the margin to market shares, as well as the nearer-term profit pool if this leads to rising promotional intensity.”
The investment case for Premier Inn owner Whitbread is aided by signs of resilient UK demand, particularly the strength of December’s revenues per available room data.
A key focus ahead of Thursday’s trading update by Whitbread will be on its cost guidance, but Morgan Stanley sees scope for this to be better than feared.
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It added: “We view Whitbread as a high-quality hotel operator, with a strong brand and market-leading position in the UK budget space, and a fast-growing presence in Germany, supported by significant real estate and a strong balance sheet.”
On Compass, the bank’s recent in-depth review of the contract catering industry has suggested the company is positioned for “many more years of structural growth”. There’s also upside from margin expansion and further share buybacks.
The shares trade on a forward price/earnings multiple of 18 times, short of pre-Covid levels despite Compass seeing faster contract sales growth and having a stronger balance sheet.
Morgan Stanley expects the company to upgrade guidance and announce a bigger share buyback at half-year results in May.
It added: “While not as catalyst-rich as the more cyclical travel/leisure names under our coverage, and while not optically that cheap, we think it is an attractive stock for long-term investors looking for compounding structural growth with low risk.”
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