Company Reports

Nestle reported a first-quarter trading update that included organic growth of 1.4%—real internal growth, or RIG, of negative 2.0% and pricing up 3.4%—which was below company-compiled consensus estimates of 2.9% and driven predominantly by the worse-than-expected RIG (down 0.5% for consensus, a 150-basis-points miss).

Nestle reported fiscal 2023 results that included organic growth of 7.2% (real internal growth of negative 0.3% and pricing up 7.5%), below the company-compiled consensus estimate of 7.4% and our own 7.5%, driven predominantly by worse-than-expected real internal growth (negative 0.3% versus negative 0.1% for consensus and 0.1% in our model). The underlying 17.3% trading operating margin was also short of the 17.4% consensus expectation, but ahead of our 17.1% forecast. Regionally, real internal growth (volume and mix effect) was positive in emerging markets and negative in developed markets as pricing continued to be strong across all geographies. At the product category level, water and prepared dishes, and cooking aids had the weakest real internal growth in fiscal 2023, down 5.1% and 2.5% respectively.

Although Nestle's performance during the pandemic has been nothing short of stellar, we believe the main drivers of this outperformance have been fueled by pandemic-led lockdowns—millions of households have adopted pets, and consumption of coffee at home has been boosted by work-from-home trends. While we don't expect a complete reversal of these trends in the future, we do expect outperformance to be less pronounced in the years ahead. We expect organic growth to slow toward the 5% level by the end of our explicit forecast period.

Although Nestle's performance during the pandemic has been nothing short of stellar, we believe the main drivers of this outperformance have been fueled by pandemic-led lockdowns—millions of households have adopted pets, and consumption of coffee at home has been boosted by work-from-home trends. While we don't expect a complete reversal of these trends in the future, we do expect outperformance to be less pronounced in the years ahead. We expect organic growth to slow toward the 5% level by the end of our explicit forecast period.

Nestle reported a nine-month sales update that included strong organic growth of 7.8% (real internal growth of negative 0.6% and pricing up 8.4%), below company-compiled consensus estimates of 8.1%, driven predominantly by worse-than-expected pricing (0.2% below consensus).

Nestle reported first-half results that included strong organic growth of 8.7% (real internal growth, or RIG, of negative 0.8% and pricing up 9.5%), ahead of company-compiled consensus estimates of 8.1%, driven predominantly by better-than-expected pricing (0.7% ahead of consensus). From a regional perspective, RIG (volume and mix effect) stood flat in emerging markets and it was negative in developed markets with pricing continuing to be strong across geographies. At the product category/business level, water, prepared dishes, and cooking aids as well as milk products and ice cream continued to exhibit the weakest RIG, down 6.3%, 4.2%, and 3.8%, respectively. We reiterate our view that despite some weak RIG numbers in noncore categories and close to 10% pricing contribution, flat to slightly negative RIG at the group level is a best-in-class performance in fast-moving consumer goods, driven by continued resilient performance from core categories (petcare, nutrition, coffee) and confectionery (driven by KitKat). Underlying trading operating margin of 17.1% was ahead of company-compiled consensus of 16.7%, but this was mainly driven by lower-than-expected distribution costs due to lower freight and energy prices (8.6% of sales versus 8.9% for consensus). We maintain our CHF 116/$131 fair value estimates and wide moat rating.

Although Nestle's performance during the pandemic has been nothing short of stellar, we believe the main drivers of this outperformance have been fueled by pandemic-led lockdowns--millions of households have adopted pets, and consumption of coffee at home has been boosted by work-from-home trends. While we don't expect a complete reversal of these trends in the future, we do expect outperformance to be less pronounced in the years ahead. We expect organic growth to slow toward the 5% level by the end of our explicit forecast period.

Nestle reported first-quarter results that included strong organic growth of 9.3% (real internal growth, or RIG, of negative 0.5% and pricing up 9.8%), ahead of company-compiled consensus estimates of 7.2%, driven predominantly by better-than-expected RIG (down 2% expected). From a regional perspective, RIG (volume and mix effect) stood well in Asia, Oceania, and Africa (up 1.3%) and Latin America (down 0.6%), with Europe, North America, and China down 1%, 0.8%, and 0.8%, respectively. At the product category/business level, along with water this quarter, prepared dishes and cooking aids as well as milk products and ice cream continued to exhibit the weakest RIG, down 7.3%, 4.3%, and 3.7%, respectively. We reiterate our view that despite some weak RIG numbers in noncore categories and close to 10% pricing contribution, flat to slightly negative RIG at the group level is a best-in-class performance in fast-moving consumer goods, driven by continued resilient performance from core categories (petcare, nutrition, coffee).

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.

Nestle's Investor Seminar, which was hosted in Barcelona this year, provided a confident message to investors, with midterm organic sales growth and profit guidance largely in line with our expectations and consensus. More specifically, Nestle now expects annual underlying EPS growth of 6% to 10% in constant currency and underlying trading operating profit margin range of 17.5% to 18.5% by 2025, both of which are in line with our estimates though at the low end (7% EPS growth and 17.8% trading margin by 2025 in our model). For 2022, Nestle now expects organic sales growth between 8% and 8.5% and an underlying trading margin of 17% (versus 7.6% and 17% in our model respectively). We do not expect to change our CHF 109 fair value estimate for Nestle materially. Shares look 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).

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.

Although Nestle's performance during the pandemic has been nothing short of stellar, we believe the main drivers of this outperformance have benefited from pandemic-led lockdowns--millions of households have adopted pets, and consumption of coffee at home has been boosted by work-from-home trends. While we don't expect a reversal of these trends in the future, we do expect outperformance to be less pronounced in the years ahead. We expect organic growth to slow below 4% by the end of our explicit forecast period.

Although Nestle's performance during the pandemic has been nothing short of stellar, we believe the main drivers of this outperformance have benefited from pandemic-led lockdowns--millions of households have adopted pets, and consumption of coffee at home has been boosted by work-from-home trends. While we don't expect a reversal of these trends in the future, we do expect outperformance to be less pronounced in the years ahead. We expect organic growth to slow below 4% by the end of our explicit forecast period.

Nestle's first-quarter sales update included strong organic growth of 7.6% (real internal growth of 2.4%, pricing of 5.2%), ahead of company-compiled consensus estimates of 5%. Growth continued to be supported by the retail channel (at an elevated level, up 5.9% in the first quarter versus 9.2% in the same period in 2021) due to still-robust demand for at-home consumption. The out-of-home channels are recovering as expected, up 35.6% in the period versus down 11.6% in the same period last year.

We don't expect to change our fair value estimates for our European food value chain coverage list due to the recent Russia-Ukraine conflict.

Nestle reported another strong set of top-line growth numbers, with organic growth up 7.5% for 2021 versus 7.1% for company-compiled consensus and 6.5% in our model. Real internal growth (mix and volume effects) was up 5.5% versus 5.2% for consensus and 4.9% in our model, and pricing was up 2% versus 1.8% for consensus and 1.6% in our model. Growth continued to be supported by the retail channel (at an elevated level--up 6.4% in 2021 versus 7.0% in 2020) due to still-robust demand for at-home consumption, with the out-of-home channels recovering as expected, up 24.5% in the period versus down 30.4% in the same period last year.

Although Nestle’s efforts to reposition itself as a nutrition, health, and wellness company have largely been timely, the company has been struggling to reach its benchmark organic growth rate of 5%-6%. COVID-19 has been a net positive for the group, as negative impacts from its exposure in out-of-home product categories and channels has been more than offset by a robust boost in sales of food-at-home categories such as coffee. The pandemic has also been a positive for the already advantaged Petcare category ("humanization" of pets and premiumization trends) as millions of households around the world decided to adopt pets during lokcdowns.

Nestle reported exceptional nine-month sales that included organic growth of 7.6% (real internal growth of 6% versus 5.2% for consensus, pricing of 1.6% versus 1.4% for consensus) ahead of company-compiled consensus estimates of 6.6%. Growth continued to be supported by the retail channel (at an elevated level--up 6.6% in the period versus 7.1% in the same period last year) due to still robust demand for at-home consumption, with the out-of-home channels recovering as expected (up 22.8% in the period versus down 31.5% in the same period last year). Nestle upgraded organic growth guidance to 6%-7% from 5%-6% (versus 6.5% in our model), as expected, and confirmed profit margin guidance of 17.5% (in line with our updated model). Despite the impressive growth number, management remained cautious on margins, citing inflationary headwinds, particularly related to packaging, transportation, and lately energy, which could not be hedged against, as opposed to agricultural commodities. With regard to the latter, inflation will continue to be a headwind for product categories such as coffee in fiscal 2022 as hedges roll off. We have slightly increased our fair value estimate for Nestle to CHF 99 from CHF 97 previously (to $107 from $106 for ADR), to account for better-than-expected third-quarter performance, upgraded guidance, and higher pricing in fiscal 2022, the result of inflationary pressures of cost inputs across the board, which are partially offset by profitability headwinds from elevated investments in sustainability initiatives and adverse inflation impacts.

Nestle reported second-quarter sales that included strong organic growth of 8.5% (real internal growth of 7.2% versus 6% for consensus, pricing of 1.4% versus 1.2% for consensus) ahead of company-compiled consensus estimates of 7%. Growth continued to be supported by the retail channel (at an elevated level--up 7.3% in the first half versus 6.8% and 8.6% in the fourth and third quarter of last year, respectively) due to robust demand for at-home consumption, with the out-of-home channels recovering impressively as expected (up 21.3% in the first half, up 84.1% in the second quarter versus down 34.6% in first-half 2020).