Morningstar

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

Consumer Defensive Sector artwork
Securities In This Article
Nestle SA
(NESN)

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Ioannis Pontikis, CFA

Director of Equity Research in Europe
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Ioannis Pontikis, CFA, is a Director of Equity Research in Europe for Morningstar*. He covers European grocers and global food and beverage companies like Tesco, Unilever, Nestle, and Danone, and manages a team of eight analysts across the Financials and Consumer sectors. He also leads Morningstar’s Equity Research Valuation Committee, advancing the firm's valuation methodology through projects such as developing new methodologies, refining our valuation model, and enhancing the efficacy of our ratings.

Before joining Morningstar in 2017, Pontikis spent six years on the buy-side, co-managing a $100M long/short equity fund and leading teams in applying machine learning to stock and equity factor selection models. He developed the fund's valuation and risk assessment framework, achieving strong risk-adjusted performance. Prior to this, Pontikis worked at Nestle S.A. in Athens, focusing on financial reporting, budgeting, and auditing proposals to improve processes.

Pontikis research has appeared in numerous media outlets including Bloomberg, CNBC, Reuters, Guardian, Frankfurter Allgemeine Zeitung among others.

Pontikis holds a bachelor’s degree in business administration from the University of Piraeus’s and a master’s degree in accounting and finance from the London School of Economics. He also holds the Chartered Financial Analyst® designation and studying towards an advanced post-masters degree in portfolio and risk management.

* Morningstar Holland BV (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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