Nestle: 9M Sales Slightly Below Expectations and Driven by Pricing, but Guidance Maintained

Nestle NESN 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).

From a regional perspective, RIG (volume and mix effect) was slightly positive in emerging markets and negative in developed markets as pricing continued 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 6.9%, 3.2%, and 3%, respectively. We reiterate our view that despite some weak RIG numbers in noncore categories and a high-single-digit 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, and coffee) and confectionery (driven by KitKat).

Despite the slightly negative share price reaction (down 2% at the time of writing), the Oct. 19 sales update was positive in our opinion given: First, positive third-quarter RIG (adjusted for one less trading day); second, confirmation of midterm objectives from Nestle Health Science and; third, continued strong performance in core categories petcare and coffee. Nestle maintained organic growth guidance of 7%-8% and confirmed expectations of margins at 17%-17.5%. Our estimates are at the low end of the guidance range for top-line and bottom-line numbers as we expect any benefit that Nestle derives from an expected improvement in gross margin to be at least partially offset by a significant increase in marketing investments in the second half, which in turn should substantially support volume/mix as pricing subsides.

Nestle shares trade in 4-star territory. We maintain our CHF 116/$131 fair value estimates and wide moat rating.