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Nestle - higher prices keep full-year guidance intact

Nestl&eacute has reported sales of 68.8bn Swiss Francs in the first nine months of the year.

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Nestlé has reported sales of 68.8bn Swiss Francs in the first nine months of the year. This reflects organic growth of 7.8%, with price hikes of 8.4% offsetting a small decline in volumes.

There was broad-based growth across geographies and categories, with Purina PetCare as the largest contributor to organic growth. E-commerce sales grew by 12.7%, reaching 16.6% of total Group sales.

Nestlé is continuing to tweak the brand portfolio. In the third quarter, it divested its peanut allergy treatment business, formed a joint venture for frozen pizzas and acquired a Brazilian chocolate company.

Nestlé remains on track to deliver full-year organic sales growth of 7-8%, underlying operating margin of 17.0-17.5%, and an increase in underlying earnings per share (EPS) of 6-10%.

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Our view

Nestlé's showing just how important it is to have a strong suite of brands. That's allowed the group to keep pushing through high single-digit price hikes, with little negative impact on volumes so far.

Underlying performance has been very impressive. A global footprint and varied product base mean the Group's been able to move with the market over the past couple of years. Exposure to pet care, health and at-home coffee products in particular helped pull in revenues from all corners of the market. These items are also exactly the kind of thing people buy over and over again in normal times.

Overall sales growth was slightly behind analyst consensus of 8.1% in the first nine months. That's not the end of the world, and given input cost pressures have been moderating, there's even scope for margin expansion this year - no mean feat in current conditions. Though, that'll be reliant on volumes staying firm as there's unlikely to be much let up on the price side of things.

Nestlé relies on hefty research & development spending to provide fuel for volume growth. New varieties and formats of existing popular brands benefit from the much larger marketing and admin budgets, ensuring they're front and centre of consumers' minds. That, in turn, encourages reliable revenues. Extra sales boost profits, and profits can be paid out as dividends or reinvested in next year's products.

That virtuous cycle has seen the dividend increase every year for 27 years - remember, all dividends are variable and not guaranteed.

There's been a bit of housekeeping recently, clearing out low-potential brands and stocking up in growth areas such as The Bountiful Company's nutrition and supplements business. A higher growth portfolio can only be a good thing, and the Group's been trimming its stake in L'Oreal, which stood at 20.1% last we heard.

Nestlé's a strong business, with a host of great brands and several growth levers still to pull. Exactly how volumes will react to continued higher prices remains to be seen, but on current trends, they're stubborn enough to support top and bottom-line performance. All being well, mid-high single-digit growth is on the cards. Of course, there are no guarantees.

At those levels, growth won't be shooting any lights out. Nonetheless, in the current environment, steady comes at a premium. The valuation's sitting at the top end of its peer group, so a lot of those strengths are already priced in.

Nestlé key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 19th October 2023