Analyst Note| Ioannis Pontikis, CFA |
Nestle reported fiscal 2020 results with organic growth of 3.6% (real internal growth, or RIG, of 3.2%, pricing of 0.4%) slightly ahead of ours (3.2% organic growth, 2.9% RIG, 0.3% pricing) and company-compiled consensus estimates (3.3% real internal growth, 0.2% pricing). The underlying operating margin was slightly lower at 17.7% (versus 17.9% in our model and 17.8% for company-compiled consensus) with underlying earnings per share at CHF 4.21 (in line with our estimates and slightly lower than consensus at CHF 4.22). In the third quarter, growth continued to be supported by the retail channel (though at a lower level--up 6.8% in the fourth quarter versus 8.6% in the third quarter) due to elevated demand for at-home consumption with the out-of-home channels remaining significantly negative (down 27%, similar to the third quarter), though at a moderating pace versus the second quarter. In terms of guidance, Nestle highlighted a “continued increase in organic sales growth toward a mid-single-digit rate and underlying trading operating profit margin with continued moderate improvement,” implying more than 3.6% and 17.7% organic growth and margins versus 4%/18.1% and 3.9%/18.1% in our model and for consensus respectively. After this mostly in-line set of results/guidance, we maintain our CHF 94 fair value estimate for Nestle. Given that shares trade 6% higher than our fair value estimate, we would advise investors to wait for a better entry point. Having said that, we need to recognize Nestle's resilient performance throughout the coronavirus pandemic so far (retail up 7% versus out-of-home down 30.4% in fiscal 2020), which we think reflects the group's wide moat and a function of the diversified portfolio of brands, categories and sales channels that are still largely relevant and in line with consumer trends.