After nine months of the year, Nestle (NSRGY) is exactly in line with our full-year 2016 revenue growth forecast of just over 1%. We are maintaining our CHF 79 fair value estimate for the ordinary shares, but we are lowering our valuation of the ADRs to $81 from $83 to account for the modest depreciation in the Swiss franc against the U.S. dollar since our previous update.
These results demonstrate that organic growth remains well below historical levels, lending support to our thesis that Nestle's historical rate of growth will be more difficult to achieve going forward. Nevertheless, the firm's wide moat should defend Nestle from the evolving threats of new entrants through the online channel and growth of low-priced substitute products. Nestle offers modest upside to our fair value estimate, derived from a discounted cash flow model, though we recommend waiting for a wider margin of safety before building a position.
Nine-month organic growth of 3.3% was a further slowdown from the 3.5% growth achieved in the first half of the year and from the 4.2% growth generated in 2015. This was also a significant shortfall from the 5%-6% "Nestle model" growth that the firm achieved on a consistent basis several years ago, and the weakness was fairly broad-based across segments, except Nestle Waters, where growth remained robust at 4.4%. There is some truth to management's claim that weak inflationary pressures are hampering pricing power, as pricing was just 0.8% in the first nine months of the year. However, the sequential organic growth slowdown was driven by volume deceleration, with 2.5% real internal growth down from 2.8% in the first half. Volumes in Zone AMS slowed by 60 basis points, affected by weak Latin American economies. Price increases in dairy and confectionery in Brazil likely also contributed to the volume pressure.
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Philip Gorham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.