EUR 850.00 For Business Accounts Only

Morningstar | Nestle’s Ingrained Supply Chain and Unmatched Category and Geographic Exposure Fortify Its Wide Moat. See Updated Analyst Note from 12 Sep 2018

After revisiting our estimates and accounting for fiscal 2018 interim results, we are raising our valuation for Nestle to CHF 81 from CHF 79. We reaffirm our wide moat rating supported by its entrenched position with retailers, a durable cost edge, and signs of monetisable brand equity in certain categories. Our estimate implies 2019 multiples of 21 times earnings and 14 times enterprise value/EBITDA. We now expect a 4% top-line CAGR and a 17.7% average operating margin over the next five years, versus our prior 3.5% and 17.2% respective marks, reflecting progress in the execution of Nestle’s structural cost-reduction plans and the impact of growth-accretive acquisitions/divestitures.

While global consumer products companies deploy their deeply grounded supply and distribution network to market products adapted to local markets and tastes, we do not think Nestle has successfully translated its unparalleled research and development investments into sound product development. Prudent R&D, marketing, and trade spend ensure that products will be in sync with the latest local consumer trends and easily available wherever consumers are shopping. Recent missteps have resulted in low new product introduction rates, with Nestle missing out or being late in adapting to the latest consumer trends.

Packaged food is increasingly becoming commoditised. The emergence of the hard discounters selling private-label products and the threat of the online channel lowering barriers to entry for smaller, nimbler manufacturers that have proved to be more adept at identifying the niche opportunities are headwinds for large-scale CPG firms.

That said, we think Nestle can stand out from the pack. Aside from structural cost-cutting efforts that will enable it to reach margins in line with competition, the new management team has put a lot of weight on reinvigorating growth via active portfolio management, resetting fixable base businesses, and further investing in high-growth categories.

Further, population growth, urbanisation, and economic growth are secular drivers in emerging markets, where the company sources a rather sizeable and growing share of its sales, which should support medium-term volumes and help stabilise pricing, though at a lower level than historical averages.

We maintain our stable moat rating. Although we view the gradual disintermediation of traditional brick-and-mortar grocers due to the emerging online channel and hard discounters' growth as a risk, we think Nestle's competitive advantages should transfer to those growing channels (online and hard discounters), while private-label growth is more of a threat to midsize brands than to Nestle's leading labels.

We assume a Stage II EBI growth rate of 3.5% versus 4.5% previously, to reflect a more competitive package goods market environment in the longer term, and we discount our cash flow projections at a rate of 7.2%, unchanged since our last update.