Nestle's (OTC:NSRGY) accelerating growth and share buy back lead us to raise our valuation range to SF48-52 per share. The stock is currently trading at SF46.6.
9 months sales down 2.2% reported, up 3.6% like for like. Reiterating 2009 guidance: growth in Q4 to further accelerate and EBIT margin to improve in constant currencies.
We think that Nestle’s performance (up 3.6%) is remarkable considering it comes on top of a very challenging comparison base, as sales in the first nine months of 2008 rose by 8.9% vs +6% average growth in the last decade.
The balance between volume (+0.7%) and pricing (+2.8%) is improving, implying +1.6% RIG in Q3. Except for Europe, all regions and segments accelerated in Q3, notably Asia, nutrition and water.
Emerging markets (+7.5% YTD) accounted for almost 70% of Nestle’s expansion. We estimate that sales in developed markets rose by only 1.6% during the 9 months period , thanks to the US market.
Despite a negative forex impact, we think Nestle could improve margins on a reported basis . The group reported good growth in the highly profitable beverages and pet foods segments. In addition, Nestle is growing faster in Americas and in zone AOA (Asia, Oceania and Africa) where margins are higher than in Europe.
However, reported earnings should be flat, impacted by forex and also lower contribution from Alcon and L’Oreal.
The increase of the share buy back programme from SF4bn to SF7bn clearly illustrates management confidence for the rest of the year and for 2010. It will allow Nestle to complete its current SF25bn share buy back plan earlier than expected.
We estimate Nestle’s Food&Beverage P/E at 14.4x 2009 and 13.4x 2010, which implies a 10% discount to peers. We think the discount should further narrow following the expected disposal of the remaining stake in Alcon between January 2010 and July 2011.