EUR 850.00 For Business Accounts Only

Morningstar | Nestle on Track After 3Q Sales Update as Guidance Is Confirmed; Shares Fairly Valued

Nestle reported nine-month sales for fiscal 2018, with organic growth of 2.8% (2.3% volume growth and 0.5% pricing) broadly in line with our expectations. We maintain our wide moat rating and EUR 81 per share ($84 per ADR) fair value estimate. Management reiterated guidance of around 3% organic sales growth for fiscal 2018 and progress toward underlying operating profit margin improvement in line with its 17.5%-18.5% target for fiscal 2020.

Growth overall was broadly in line with our full-year 3% organic growth estimates (2.3% volume growth, 0.7% pricing). Geographically, the robust organic growth of 4.4% (3.3% volume and 0.7% pricing) in Asia and high-single-digit growth for infant nutrition in the third quarter in the same region were all positive surprises for investors after Danone reported weak third-quarter sales for its specialized nutrition business in China. On the other hand, given the warm weather in Western Europe, investors may have expected a better performance from Nestle Waters (up close to 4% in the third quarter), which underperformed Danone's water segment sales growth by more than 200 basis points in the same period. In other regions, Europe and Americas were up 1.6% and 1.4%, respectively, but pricing is still waning in the former, driven by negative pricing in Western Europe. Pricing was weak in other businesses as well (6% organic growth, 0.3% pricing), with Nespresso, skin health, and health science growing healthily at mid- to high-single-digit rates.

Anemic global inflationary pressures are weighing on prices across consumer staples, but we think Nestle is also feeling the pressure from price competition in its commoditized packaged food and water businesses. As inflation returns, however, we expect more pricing contribution to organic growth. In the meantime, Nestle's volume growth is at the high end of the food and beverage industry, a good indication that its ability to defend shelf space is intact.

The company has reached an agreement to sell its Gerber life insurance business, which is already reflected in our model, and it is considering strategic options for Nestle Skin Health, which we view as positive, given the segment's minimal overlap with the group's core operations.

Nestle announced changes in its executive board, with Chris Johnson, currently head of group human resources and business services, succeeding Wan Ling Martello, CEO of the Asia, Oceania, and sub-Saharan Africa zone. Beatrice Guillaume-Grabisch, currently CEO of Nestle Germany, replaces Johnson.