Top broker warns Brambles Limited share price to fall in the next 2 months

The share price of Brambles Limited (ASX: BXB) is under pressure on Wednesday and could become a target of short sellers after Morgan Stanley predicted that the stock will fall over the next 60 days.

The stock slipped 1.1% to $9.78 in the last hour of trade, while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has slipped 0.4%.

There is a 60% to 70% chance that the underperformance will continue for the next two months, according to Morgan Stanley.

“BXB’s share price has had some positive momentum through March (+7% vs ASX200 -4%). However, we believe it is likely reflective of improved sentiment following BXB’s investor trip where the company outlined a number of programs to improve supply chain efficiency and implement increased automation,” said the broker.

“We expect ongoing headwinds to the business and the benefits of these to be long-dated and near-term earnings leverage to remain elusive.”

Morgan Stanley has an “underweight” rating on the stock with a price target of $9.00 a share.

Brambles’ interim result that was released in February showed mounting cost pressures and analysts weren’t too taken on its profit report.

Its lack of earnings leverage is a concern where the rise in revenue has not translated to a larger increase in profit. Logistics companies like Brambles have a relatively high fixed-cost base so earnings should move more than revenue.

However, Brambles still offers good offshore exposure for those looking to benefit from the pick-up in economic growth out of the US and Europe.

Growth in those economies is expected to outpace Australia where weak wage growth, record high household debt, and a rapidly cooling property market are weighing on growth.

Those who believe that the US dollar will strengthen against the Aussie battler will also find Brambles an ideal stock to own as the company will get an earnings boost when its US dollar earnings are converted into the local currency.

There are other stocks that offer good offshore exposure as well. These include packaging group Amcor Limited (ASX: AMC), alcoholic beverages company Treasury Wine Estates Ltd (ASX: TWE), hearing implant company Cochlear Limited (ASX: COH) and building materials supplier Boral Limited (ASX: BXB) – just to name a few.

But I won’t be too quick to write off Brambles even though the company does have issues to overcome. The stock is trading on reasonable multiples, so it isn’t like you’d have to cough up for the stock.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited and Brambles Limited. The Motley Fool Australia has recommended Cochlear Ltd. and Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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