Stock price: SF52.5 ($47.47 USD)
Conclusion: We reconfirm our valuation range (SF59-SF62 per share) for Nestle (OTCPK:NSRGY).
Key Take Aways:
- Emerging markets to provide 3-4% growth pa. Emerging markets account for 35% of sales today and should move up to 45% of sales by 2010 (implying 8%+growth pa). Nestle’s geographic presence coupled with a unique portfolio of brands, notably Nescafe, Nido, Kit Kat, Nestea and Pure Life bode well for future growth. Category wise, Nestle looks strong in emerging markets in culinary, milk products, confectionery, infant nutrition and coffee. However, it is still underrepresented in water.
- Consumer segmentation leads to further growth opportunities. First, high end consumers in emerging markets eager to buy premium products such as Nespresso, Dolce Gusto, Nido Excella Gold or Nestle Gold. Second, less affluent spenders in mature markets with specific needs such as seniors, students, migrants, hispanic communities.
- Nutrition back to growth: 1) Jenny Craig which suffered from the recession in the US could start to recover and expand internationally. Gerber is growing double digit in cereals; 2) Medical nutrition seems back on track with less SKU’s, reduced headcount and improved contracts; 3) Infant nutrition in Europe? Nestle admitted that they were too hungry and had to revise their pricing strategy. Sales growth in infant nutrition has resumed thanks to improved value for the consumer, higher marketing support, investments in the pharmacy channel and launch of new products. Nevertheless, there is still work to be done to improve testing and revamp the product portfolio in Europe. As to EFSA regulation in Europe, management ackowledged that they are in a learning curve which might lead them to adjust their claims.
- Nestle made it clear that the long term target of 10% growth and 20% margin for the division will not be achieved in the coming years.
Future growth: increasingly liquid:
Nespresso (nearly SF3bn sales) launched in 1985, has grown at an annual rate of 30%, with Europe (142 boutiques) accounting for 90% of sales. Future growth will be increasingly driven by expansion in America (29 stores), Asia (39 stores) and Africa (13 stores). Nestle won’t respond to generic rivals by cutting price and starting to sell its capsules in mass retail. The company will reinforce its luxury marketing approach and initiate legal actions, if appropriate (cf Sarah Lee (SLE)). Dolce Gusto is growing rapidly and could achieve SF1 bn by 2014. We feel more sceptical about the launch of Special T (Nespresso’s replica in tea) as we are not sure that Nestle’s technology will make a real difference.
- Confectionery: Nestle reiterated that they don’t need a big deal as they focus on chocolate, with a leading position in emerging markets (18% share-44% of the business) where growth is faster combined with above average margins. Nestle’s CAGR (2006-2009) in confectionery reached 6% vs 5% for the market, boosted by 13% growth pa in emerging markets. Nestle has been less successful in mature markets where the group underperformed peers with only 1.4% growth pa.
Management confident for 2010 despite headwinds in Europe:
“Emerging markets are emerging, US should rebound while out of home consumption is coming back. Even in Europe, ageing population is an opportunity..” according to Nestle’s CEO. As a result, Nestle sticks to its guidance of beating 2009 top line growth.
Nestle trades at 16.4xP/E based on 2010 estimates, in line with peers. EV/EBITDA multiple (adjusted for L’Oreal) of 8.8x implies 15% discount to peers. We expect a further rerating and confirm our SF59-SF62 target range.
Disclosure: Long Nestle at time of writing.