Essity's Cost Savings Help It Weather Continued Margin Headwinds in 1Q; Shares Overvalued

No-moat Essity's profitability remained hampered by higher pulp and oil-based raw material costs in the first quarter, with adjusted operating margin contracting 70 basis points to less than 10% (below our nearly 12% full-year estimate). Although we expect the near-term cost environment to remain challenging, we're encouraged by Essity management’s actions to defend its bottom line. For one, its efforts to extract costs from its operations helped its selling, general, and administrative expense ratio leverage 80 basis points during the quarter to 16.9%. Further, the firm's top-line trajectory remains solid, with organic sales up 4% versus our low-single-digit estimate for the year, including a 3% contribution from price/mix. We're not anticipating a material change to our SEK 222 fair value estimate as we adjust our near-term forecast, as a higher sales and lower profitability outlook should largely offset one another, and would suggest investors wait for a more favorable entry point.