Some Disappointment in Nestle’s Q4 Overshadows Higher-Than-Expected Guidance
We don’t view the results as a sign of weak pricing power, however.
Nestle NSRGY reported fourth-quarter and full-year results with strong organic growth of 7.5% and 8.3% (real internal growth of negative 2.6% for the fourth quarter and 0.1% for the full year), behind company-compiled consensus estimates of 8.8% and 8.6% respectively. From a regional perspective, real internal growth (volume and mix effect) in North America was particularly weak at negative 4.9% in the fourth quarter and negative 1.3% for the full year versus up 0.8% for the fourth quarter and 0.9% for the year in Europe, contrary to stronger/weaker top-line growth numbers reported by peers in North America/Europe. At the product category/business level, prepared dishes and cooking aids as well as milk products and ice cream recorded weak real internal growth numbers too, at negative 6.9% and negative 4.3%, respectively, for the full year. All in all, Nestle gave a rather disappointing picture of volume and mix in the fourth quarter, attributing this to portfolio and stock-keeping unit optimization as well as temporary capacity constraints in water, with the latter being less of a critical driver, in our opinion, given the relatively low revenue contribution in the portfolio. That said, we don’t view the current print as a sign of weak pricing power for Nestle, given that it was primarily caused by underperformance in noncore categories (prepared dishes down and milk products) versus continued resilient performance for core categories (petcare and coffee). For 2023, Nestle introduced organic growth guidance of 6%-8% versus 5% in our model, with cautious guidance on margins at 17%-17.5% (versus 17.2% in our model). We maintain our CHF 109 fair value estimate and wide moat rating. We plan to increase our organic growth forecast for 2023 and maintain our margin forecast (17.2%, within guidance) to reflect upbeat organic growth guidance, but we don’t expect a material change to our fair value estimate as a result of these changes. The shares appear fairly valued.
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