Nestle's Q3 Ahead, With Slightly Negative Real Internal Growth Not a Concern; Shares Fairly Valued

Nestle reported nine-month sales with strong organic growth of 8.5% (real internal growth of 1%, pricing of 7.5%), ahead of company-compiled consensus estimates of 8.3%. Growth continued to be supported by the retail channel (at an elevated level, up 8.5% in the third quarter) due to the strong pricing contribution, a function of persistent inflation and a still-robust consumer. Out-of-home channels are recovering as expected, up 20.2% in the period. More importantly, third-quarter real internal growth, or volume and mix, was slightly negative (down about 0.2%), a function of strong pricing in the quarter (up 9.5%). We don't view this as a sign of weak pricing power for Nestle, given that it was primarily caused by underperformance in noncore categories (prepared dishes down 6.3% and milk products down 3.6%) versus strong performance for core categories (petcare, water, and coffee saw 4.8%, 6%, and 0.7% real internal growth, respectively).