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Nestle - steady rise in organic sales despite disruption

Sophie Lund-Yates, Equity Analyst | 21 October 2020 | A A A
Nestle - steady rise in organic sales despite disruption

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Nestle Sa Ordinary CHF0.01

Sell: 120.50 | Buy: 120.54 | Change -1.54 (-1.26%)
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Nestlé's sales hit CHF61.9bn in the first nine months of the year, up 3.5% on an organic basis and up 4.9% in the third quarter. Growth was driven by a 3.3% rise in volumes, while increased prices contributed just 0.2%. Performance was boosted by "strong momentum" in the Americas, the Purina Petcare brands and Nestlé health science.

While at-home products continue to do well, out-of-home products continue to struggle, although there was some improvement in the third quarter.

Nestlé now expects full year organic sales growth of around 3%. Underlying operating margins and earnings per share are expected to improve.

The shares rose 1.3% following the announcement.

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Our View

Coronavirus has been a bit of mixed bag for the Nescafé and KitKat maker. Stockpiling was an initial boost, but now trading's started to normalise it's more important to focus on the bigger picture.

The first thing Nestlé has to shout about is a successful volume-led approach to sales, which we tend to prefer over relying on price increases. That's helped deliver underlying sales growth of at least 2% for over 20 years. Even in these unusual times, not all consumer groups have managed to capitalise on the increased demand.

Crucially, the group thinks sales will hold up for the remainder of the year. With margins set to improve too, earnings per share will be taken along for the ride. We should say though that it's still too early to be sure about what's going to happen, and it's not all peachy.

There's long been pressure on prices, which reflects a lack of brand power potency in the wider industry. The volume-centred approach means Nestlé is better placed to tackle this dilemma than some other groups, but any major downward pressure on price tags wouldn't be the best news.

Nestlé's modus operandi relies on a research and development spend of 1.7bn Swiss Francs (CHF), providing firepower to create new products and varieties. One innovations are established, the marketing and admin budget of almost CHF 20bn ensures they're front and centre of consumers' mind, which in turn encourages reliable revenues. Extra sales boost profits, and profits can be paid out as dividends or reinvested in next year's products. The cycle can start again.

Attempts to streamline the business means Nestlé is now focussed on the core food, beverage and nutritional health products. What it means for the group's 23% shareholding in L'Oreal remains to be seen.

However, Nestlé's resilience comes at a price, with a Price/Earnings ratio some way above the long term average. That reflects the group's strengths, but also means there's pressure for sales to keep moving forwards. We believe Nestlé can manage this, but this is not a company likely to deliver dizzying levels of growth from here. It's more steady-Eddie than stellar growth stock. And remember, there are no guarantees.

Nestlé key facts

  • Price/Earnings ratio: 24.0
  • 10 year average Price/Earnings ratio: 19.6
  • Prospective dividend yield (next 12 months): 2.6%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter trading details (underlying)

Nestlé said demand for at-home consumption was centred on pet products, those with health benefits, and coffee at-home. Confectionary and water saw sales decrease, because of the higher exposure to out-of-home spending. Within this shift retail sales did well, but online sales rose 47.6% and now account for 12.3% of group sales.

Nestlé's largest division, the Americas, saw sales increase 5.1% to CHF 25bn, with the vast majority being driven by a rise in volumes.

North America saw a single digit growth rate and the largest growth contributor was Purina PetCare. There was strong trading in premium brands, and beverages grew by double-digits, including strong demand for Starbucks at-home products. Latin America reached high single-digit growth, with broad-based contributions across geographies and most product categories.

Declines in China offset growth elsewhere in the Asia, Oceania and Africa region. Organic sales were flat reflecting a negligible rise in pricing being offset by an equal decline in volumes. Trends in China turned positive in the third quarter.

Europe, Middle-East and North Africa, saw sales rise to CHF15bn, up 2.9% on an organic basis. That was entirely driven by volumes as pricing actually fell 0.4%. There was positive growth overall from all regions, with standout performances coming from Russia, the UK and France. Similar to other geographies, there was strong demand for Purina, coffee and vegetarian products.

Sales in the other businesses rose 7.4%, which was again driven by volumes (up 6.8%, pricing up 0.6%). Nespresso grew at a mid-single digit rate, and the opening of boutiques meant trading turned positive in Europe during the third quarter.

Of the ongoing strategic reviews the group said: "The strategic reviews for parts of the Waters business in North America and the Yinlu peanut milk and canned rice porridge businesses in China are fully on track. Both reviews are expected to be completed in early 2021."

Of its pledge to make 100% of its packaging recyclable or reusable, and to reduce the use of virgin plastics by a third by 2025, Nestle said 87% of its total packaging and 66% of plastic packaging is now recyclable or reusable.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 for more information.