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Nestle - momentum continues into 2019

George Salmon | 18 April 2019 | A A A
Nestle - momentum continues into 2019

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Nestle Sa Ordinary CHF0.01

Sell: 101.76 | Buy: 101.78 | Change -0.02 (-0.02%)
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Nestlé has reported a 3.4% rise in underlying sales in the first quarter of 2019, with growth across all product categories. That represents an increase on the 3% growth seen over 2018.

The shares rose 1.1% following the announcement.

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Our View

Nestlé's first ever product was a child nutrition supplement - a sector that still accounts for 17.7% of its sales. Other staples like chocolate and Nescafé have joined the stable over the group's 152 year history, with the theme being very much evolution, rather than revolution.

Consistency has been the watchword for the group's financials too. Nestlé has delivered underlying sales growth of at least 2% for over 20 years with dividends increasing every year over that timeframe too. We think the group can continue the run, although sales growth has been steady rather than spectacular in recent years.

The secret to success is a tried and tested formula of innovate, advertise and repeat.

A research and development spend of CHF 1.7bn gives the group plenty of firepower to create new products and varieties. Once innovations are established, the marketing and admin budget of over CHF 20bn ensures they're front and centre of consumers' minds.

That helps generate extra sales and boost profits. Profits which can be paid out as dividends or reinvested in next year's products. The cycle can start again.

After a flirtation with pharmaceuticals and skincare, the focus is returning to the core food, beverage and nutritional health products. What that means for the group's shareholding in L'Oréal, which has swollen to a value of EUR31.6bn since first investing in 1974, remains to be seen. Especially given recent pressure from activists to sell the stake.

Possibly in response to those same activists, Nestlé has adopted plans to boost margins. Higher profitability means analysts expect profits to rise from CHF15.5 last year to CHF 18.6bn by 2021, and hopes are high that the dividend can follow suit and rise too. The prospective yield is 3% next year, but of course, there are no guarantees.

Forecasts for earnings and dividend growth support the current valuation of 21.6 times expected earnings, ahead of the longer-term average.

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First quarter trading details

Reported sales were CHF 22.2bn, which includes a 1.2% boost from acquisitions and a 0.3% headwind from currency movements. Underlying growth was mostly driven by volume, although price increases also contributed.

Nestlé's largest division, the Americas, saw sales rise 11.1% to CHF 7.5bn- however that was boosted by the Starbucks licencing deal and favourable exchange rate movements. On an underlying basis, sales rose 3.4%, driven by Latin America, in particular Brazil. Steady progress in North America was boosted by strong sales of Purina petcare.

Asia, Oceania and Africa delivered sales of CHF 5.4bn, up 3.3% on an underlying basis, as South-East Asia and China more than offset a slight slowdown in Japan.

Europe, Middle-East and North Africa sales were down 0.7%, as underlying growth of 2.1% was more than offset by unfavourable FX movements. Purina infant nutrition and the group's vegetarian range all had a good quarter.

Sales were CHF 1.8bn in the Waters business. Nestlé increased prices to counter cost inflation in packaging and distribution, which ensured underlying sales rose 2% despite a 2.3% decline in volumes.

Sales in the other businesses were CHF 2.8bn. That reflects organic growth of 6.8%, almost entirely driven by higher volumes. Nespresso sales were particularly strong in North America, while Skin Care and Health Science sales were also up.

Nestlé has reiterated previous guidance for the year, and continues to target organic sales and operating margin growth.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.