Imperial Oil Is Already Trading At A Premium, Morgan Stanley Says In New Underweight Rating

Morgan Stanley issued a note on Imperial Oil Ltd. (NYSE: IMO) after recent analysis saying that the firm is trading at a premium with expected returns that may outperform its peers. Analysts initiated coverage on the company with an Underweight rating and a $36 price target.

Analysts Benny Wong and Evan Calio wrote, "IMO's superior returns and competitive advantages are reflected in its premium valuation. We expect dividend growth after years of high capex but at a level below what's priced in."

Morgan Stanley gave two key reasons why they rate Imperial Oil as Underweight.

Conservative dividend growth

While analysts noted Imperial Oil may be entering a period of low capital expenditures Morgan Stanley believes there is a near- to mid-term cash flow uncertainty. Thus, analysts highlighted a lower dividend growth rate than the 6 percent that's priced into the stock may be expected.

Valuation

Imperial Oil is trading at an over 5x premium above its peers. Historically, the company has traded at 1.5x due to competitive advantages and high levels of technological expertise. Thus, analysts believe that the near term may not be the best time to invest in the company due to these high valuations.