On Thursday, Jefferies made a significant adjustment to its stance on Ashland Inc . (NYSE:ASH), shifting the stock's rating from Hold to Buy and increasing the price target to $126 from the previous $100. The revision comes as the firm anticipates an end to destocking and a modest sequential demand improvement in consumer markets, which should help Ashland's margins return to normal levels.
The upgrade reflects a broader industry consensus that while destocking in consumer channels has concluded, restocking will depend on a visible and sustained increase in demand. This situation is expected to benefit Ashland in the coming quarters. Jefferies projects an improvement in the company's EBITDA margins, foreseeing an 80 basis points expansion in 2024, a substantial 300 basis points expansion in 2025, and a further 160 basis points in 2026.
The firm's optimistic outlook is based on several factors, including the expected increase in utilization rates, the divestiture of Ashland's nutraceutical business, the re-purposing of CMC and MC industrial assets, and a favorable mix effect from a stronger product pipeline. These developments are anticipated to result in significant margin expansions over the next few years.
Jefferies also predicts that Ashland will experience incremental margins ranging from 50-55% to 85-90%, depending on the pace of volume recovery in the second half of 2024 through 2025. This is attributed to the dynamics of fixed-cost absorption. The company is expected to convert a 3% sales growth into a 23% increase in earnings per share over the next three years, showcasing a robust leverage of sales to earnings.
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