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Top broker tipping Amcor Limited (ASX:AMC) to outperform through reporting season

The share price of Amcor Limited (ASX: AMC) could be poised to run ahead of the market over the next two months if Morgan Stanley’s prediction is on the money.

The broker believes there is a 60%-70% chance that shares in the global packaging company will outpace the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index over the period as the company has turned a corner following its disappointing FY18 performance.

Some investors may be sitting up and noticing with the stock rising 0.4% to $15.12 in lunchtime trade when the top 200 stock index is up 0.2%.

“In constant currency terms, we forecast EBIT [earnings before interest and tax] growth to accelerate from ~0% in FY18e to ~8% in FY19e,” said Morgan Stanley.

“With the stock trading at a ~25% discount to the ASX200 Industrials ex Financials, well below its five-year average of ~7%, we do not believe this is reflected in the current valuation.”

The stock hasn’t been this cheap on a relative basis in nearly 10 years. The attractive valuation of Amcor may become more obvious to the market when it reports its full-year results next month with the broker upgrading the stock to “overweight” from “equal-weight” and lifting its price target by $1 to $15.80 per share.

The potential turn in sentiment would be a welcome change with the stock falling 1.4% over the past 12-months with the ASX 200 index up 10%.

Investors had shunned the stock as rising raw materials costs, challenges in the North American beverage market, tough trading conditions in Latin America and a fall in tobacco volumes in emerging markets dragged on its profits.

But most of these headwinds are easing and any commentary from management to support this view will help trigger a re-rating in the stock.

The rising US dollar to the Aussie will provide an additional boost to Amor’s bottom line as well when the company converts its US currency income into Australian dollars.

“We acknowledge some ongoing risk in certain end-markets but note that even in the absence of FY19 growth, AMC trades at ~1 standard deviation below the 5yr average,” added Morgan Stanley.

“As a result, we believe the balance of risk remains to the upside.”

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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