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.