Nestle stock dips as Citi downgrades on low visibility

Investing.com -- Citi analysts downgraded Nestle SA (SIX:NESN ) shares from Buy to Neutral on Thursday, pointing out short-term earnings downside risks and concerns over the company's organic sales growth (OSG) deceleration.

The Wall Street firm also reduced the price target on the stock from CHF105 to CHF90, implying just a 7% upside from current levels.

Nestle’s shares fell 1% in European trading.

The rating revision is grounded in an analysis that predicts a 6% downside to Nestle's fiscal year 2025 consensus earnings, driven by cost of goods sold (COGS) and pricing constraints, as well as increased operational expenses. Limited returns on investments also contributed to the downgrade.

Citi anticipates that Nestle will face margin pressures, forecasting a margin of 17.3% for fiscal year 2024 and 16.4% for fiscal year 2025, which is below the company's guidance of 17.5-18.5% and consensus margin estimates.

“Assuming, that the new CEO may want some reinvestment leeway, we think the company may update its FY25 target to a 16-17% range,” Citi analysts said in a note. “Our new FY25 EPS is 6% below consensus.”

Citi further notes that Nestle's recent underperformance may be more related to category dynamics rather than underinvestment, as the company's advertising and promotional spending is deemed adequate.

“Our category growth leverage analysis suggests that during COVID, Nestlé’s category portfolio commanded a c100bps outperformance to peers, but has now completely unwound, even reaching an estimated 20bps underperformance in 2024…. compounded then by specific issues at the company’s OSG level,” the note states.

“However, a category growth leverage in line with peers marks a simple return to 2015-2020 levels and a c4% OSG, rather than a 5-6% range, in line with Danone, may be Nestlé’s real algo,” it adds.

Therefore, an increase in brand support may not be enough “to move the needle” in the near term, analysts said.

While a portfolio review could offer a quicker fix to Nestle's growth issues, it may result in short-term earnings per share (EPS) dilution without share buybacks.

According to Citi, the potential sale of Nestle's stake in L'Oréal (EPA:OREP ) is mentioned as a possible source of funds, but the report suggests that it would be more strategic to use such funds for a deal that enhances OSG rather than for share buybacks that might boost EPS growth but not valuation.

Source: Investing.com