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Stock Analyst Update

Third Quarter Shows the Good and the Bad of Nestle

The wide-moat firm's organic sales growth is on track to meet our estimates this year, but that's still lower than we'd expect to see.


The good news from  Nestle's (NSRGY) third-quarter sales update was that the firm is bang on track to meet our organic sales growth estimates this year. The bad news is that those estimates remain well below the performance level we think the business is capable of in the medium term. Nestle has a wide economic moat based on significant scale and supply-chain advantages it holds over new entrants, and this was evident in the reasonable 1.8% organic volume growth achieved in the third quarter. However, weak pricing shows the limited pricing power inherent in the portfolio, and we believe Nestle will depend on the return of macroeconomic tailwinds to return to the mid-single-digit growth level that both we and management believe it can achieve in the medium term. We are reiterating our CHF 79 fair value estimate, and after a strong performance since the investor seminar, we regard the shares as slightly rich.

Third-quarter organic growth was 2.6%, exactly in line with Unilever over the same period. Only the AOA segment reported growth close to our medium-term estimates, with 5.3% organic growth, driven by 3.6% volume growth. This is particularly impressive given the disruption from the Goods and Services Tax introduced in India this year, which weighed on pricing, and suggests that Maggi is continuing to regain share. This tailwind is likely to slow from the fourth quarter, however, as the company cycles the return of Maggi to the shelf in India. Other notable strong performers were the coffee and Nespresso franchises, both of which achieved mid-single-digit growth. 

Pricing, however, remains weak: 1.0% in Zone Americas, with flat pricing in North America; 0.5% in Europe, the Middle East, and North Africa; 0.1% in Nestle Waters; and 0.6% in nutrition. We estimate that the normalisation of global inflationary pressures would add around a percentage point to Nestle's organic growth, but continued anaemic price/mix points to weak pricing power within most of the portfolio.

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Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.