Nestle's Disappointing RIG in Q4 Overshadows Higher-Than-Expected Organic Growth Guidance

Nestle reported fourth-quarter and full-year results with strong organic growth of 7.5% and 8.3% (real internal growth of negative 2.6% for the fourth quarter and 0.1% for the full year), behind company-compiled consensus estimates of 8.8% and 8.6% respectively. From a regional perspective RIG (volume and mix effect) in North America was particularly weak at negative 4.9% in the fourth quarter and negative 1.3% for the full year versus up 0.8% for the fourth quarter and 0.9% for the year in Europe, contrary to stronger/weaker top-line growth numbers reported by peers in North America/Europe. At the product category/business level, prepared dishes and cooking aids as well as milk products and ice cream recorded weak RIG numbers too, at negative 6.9% and negative 4.3% respectively for the full year. All in all, a rather disappointing picture in volume and mix from Nestle in the fourth quarter, with the company attributing this to portfolio and stock-keeping unit optimization as well as temporary capacity constraints in water, with the latter being less of a critical driver in our opinion given the relatively low revenue contribution in the portfolio. That said, we don't view the current print as a sign of weak pricing power for Nestle, given that it was primarily caused by underperformance in noncore categories (prepared dishes down and milk products) versus continued resilient performance for core categories (petcare and coffee). For 2023, Nestle introduced organic growth guidance between 6% and 8% versus 5% in our model, with cautious guidance on margins at between 17% and 17.5% (versus 17.2% in our model). We maintain our CHF 109 fair value estimate and wide moat rating. We plan to increase our organic growth forecast for 2023 and maintain our margin forecast (17.2%, within guidance) to reflect upbeat organic growth guidance, but we don't expect a material change to our fair value estimate as a result of these changes. Shares are fairly valued.