Strong H1 for Nestle, In Line With Industrywide Outperformance; Guidance Upgraded; FVE up to CHF 109

Nestle's first-half 2022 results included strong organic growth of 8.1% (real internal growth of 1.7%, pricing of 6.5%), ahead of company-compiled consensus estimates of 7.4%. Growth continued to be supported by the retail channel (at an elevated level, up 6.7% in the first half versus 7.3% in the same period in 2021) due to strong pricing contribution, a function of a persistent inflationary environment and a still robust consumer. The out-of-home channels are recovering as expected, up 29.6% in the period versus up 21.3% in the same period last year. The underlying trading operating profit margin was 16.9%, ahead of company-compiled consensus at 16.7%. For 2022, Nestle upgraded organic growth guidance to 7%-8% from "around 5%," versus 7.6% in our updated model with cautious guidance on margins at around 17% from 17%-17.5% and versus 17% in our model (unchanged). The margin outlook is the result of higher uncertainty due to inflationary headwinds, particularly related to packaging, transportation, and energy, which could not be hedged against, as opposed to agricultural commodities. Inflation will continue to be a headwind for product categories such as coffee in 2022 as hedges roll off. We slightly raise our fair value estimate to CHF 109 from CHF 106 previously to account for higher pricing contribution in 2022 (to 6.2%), the result of inflationary pressures of cost inputs across the board, while we maintain our margin forecast (17%, at the low end of previous guidance and in line with current), the result of headwinds from elevated investments in sustainability initiatives and adverse inflation impacts.