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UPDATE 1-Morgan Stanley cuts US retail, food and drug sector

Thu Sep 17, 2009 8:41am EDT

Stocks

   

Sept 17 (Reuters) - Morgan Stanley downgraded the U.S. retail, food and drug sector to "in-line" from "attractive," and cut its 2010 estimates on supermarket chains Safeway Inc (SWY.N), Supervalu Inc (SVU.N) and Kroger Co (KR.N) to below consensus levels.

"We no longer believe our staples-focused industry group will outperform the S&P," Morgan Stanley wrote in a note.

Investors should rotate out of grocery and position for a discretionary-driven margin turnaround in warehouse store Costco Wholesale Corp (COST.O), the coming generic drug wave for drugstores and continued momentum in discount chain Dollar Tree Inc (DLTR.O), it said.

Separately, the investment bank cut Kroger Co (KR.N) to "equal weight" from "overweight," saying heightened price competition and lackluster sales trends could extend into 2010 at the supermarket operator.

"While Kroger is out-executing its peers, margin sacrifice is limiting earnings growth, and we do not see a valuation catalyst to drive shares higher," Morgan Stanley said.

On Tuesday, Cincinnati-based Kroger -- which operates stores under its own name as well as Ralphs, King Soopers, Fry's and Food 4 Less -- reported a quarterly profit that missed market expectations hurt by sharp price declines for staples like produce and dairy. [ID:nN15548566] (Reporting by Renju Jose in Bangalore; Editing by Anil D'Silva) ((renju.jose@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters messaging: renju.jose.reuters.com@reuters.net))



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