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Nestle Reports Exceptional Q3; Upgrades Growth Guidance; Inflation Pressures Reiterated; Shares Rich

Ioannis Pontikis, CFA Senior Equity Analyst

Analyst Note

| Ioannis Pontikis, CFA |

Nestle reported exceptional nine-month sales that included organic growth of 7.6% (real internal growth of 6% versus 5.2% for consensus, pricing of 1.6% versus 1.4% for consensus) ahead of company-compiled consensus estimates of 6.6%. Growth continued to be supported by the retail channel (at an elevated level--up 6.6% in the period versus 7.1% in the same period last year) due to still robust demand for at-home consumption, with the out-of-home channels recovering as expected (up 22.8% in the period versus down 31.5% in the same period last year). Nestle upgraded organic growth guidance to 6%-7% from 5%-6% (versus 6.5% in our model), as expected, and confirmed profit margin guidance of 17.5% (in line with our updated model). Despite the impressive growth number, management remained cautious on margins, citing inflationary headwinds, particularly related to packaging, transportation, and lately energy, which could not be hedged against, as opposed to agricultural commodities. With regard to the latter, inflation will continue to be a headwind for product categories such as coffee in fiscal 2022 as hedges roll off. We have slightly increased our fair value estimate for Nestle to CHF 99 from CHF 97 previously (to $107 from $106 for ADR), to account for better-than-expected third-quarter performance, upgraded guidance, and higher pricing in fiscal 2022, the result of inflationary pressures of cost inputs across the board, which are partially offset by profitability headwinds from elevated investments in sustainability initiatives and adverse inflation impacts.

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Company Profile

Business Description

With a 150-year-plus history, Nestle is the largest food and beverage manufacturer in the world by sales, generating more than CHF 90 billion in annual revenue. Its diverse product portfolio includes brands such as Nestle, Nescafe, Perrier, Pure Life, and Purina. Nestle also owns just over 23% of French cosmetics firm L'Oreal. The company has a vast portfolio of global products, with 34 brands each achieving more than CHF 1 billion in sales annually and a geographic presence that spans 189 countries.

Avenue Nestle 55
Vevey, CH-1800, Switzerland
T +41 219242111
Sector Consumer Defensive
Industry Packaged Foods
Most Recent Earnings
Fiscal Year End Dec 31, 2021
Stock Type
Employees 273,000