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Leading global consumer firm is set for long-term growth
Thursday 04 Feb 2021 Author: Ian Conway

Despite being the world’s largest food and beverage company, Nestle has been an undoubted winner from the worldwide restrictions imposed due to Covid, as 90% of its sales depend on the in-home market and just 10% are driven by the out-of-home and food service market.

While we’ve all been cooped up indoors, many of us with our pets, it seems we’ve been consuming more of the company’s products than ever before.

This was borne out by sales for the nine months to September, which showed in-home revenues up by 7.1% with third-quarter revenues alone up 8.6%. By comparison out-of-home sales were down around 30% in the first nine months of last year, although the fall moderated from 55% in the second quarter to 26% in the third quarter.

Sales accelerating

In fact, the third quarter of last year saw the highest level of organic sales growth in almost seven years at 4.9%, compared with consensus forecasts of just 2.6%. The increase was almost all (4.7%) thanks to what the company calls real internal growth, that is volume and product mix.

Chief executive Mark Schneider even commented on the analyst call that the quarter ‘felt different’ to the previous three months, with sales less dependent on re-stocking by retailers and more on an underlying increase in in-home consumption of the firm’s core premium categories.

Sales in the Americas, which represent 46% of group turnover, increased an impressive 6.2% on an organic basis in the first nine months of last year, with real internal growth of 5.7% and price rises of 0.5%. US sales were up mid-single digits while Brazil registered double-digit growth.

Growth in Europe, Middle East and North Africa, which make up 30% of sales, was more measured, up 2.2% on an organic basis. Prices were slightly lower oven nine months, but improved in the third quarter.

Other African and Asia-Pacific markets eked out organic growth of 0.6% split evenly between real internal growth and price rises, with China registering positive growth for the first time in several quarters.

Premium brands work well online

Online sales accounted for 12.5% of group revenues at the end of the third quarter, an increase of almost 50% on the previous year, with Nestle seeing higher market shares online than offline.

This suggests that rather than being disrupted by cheaper rivals, the premium Nescafe coffee and ‘heritage’ Nestle confectionery and food brands still appeal to online shoppers, who maybe due to being confined to their homes feel they deserve to treat themselves a little.

Nespresso posted mid-single digit organic sales growth with strong momentum in online sales helped by the new Vertuo system, which offers coffee in more cup sizes with a wider range of blends than the
original system.

Purina pet care products experienced the strongest growth of any category, up 10.6% on an organic basis over nine months, underlining how beneficial lockdown has been for all types of companies catering to the pet care market.

Re-shaping the business

True to his promise when he took over, the chief executive continues to drive Nestle out of low-margin non-core markets and into new growth areas.

Last November the firm disposed of its Yinlu peanut milk and canned rice porridge business in China, which had sales of $768 million in 2019, to local firm Food Wise, and it is on track to dispose of its North American Waters business in the first quarter of this year.

The Waters business, which includes the Pure Life brand and generates profits of $600 million, could fetch as much as $5 billion according to Reuters.

At the same time, Schneider has taken the firm into the direct-to-consumer market with the acquisitions of US prepared-meal delivery firm Freshly for $1.5 billion and a minority stake in UK firm Mindful Chef late last year.

He also bolstered the fast-growing Health Science business last year with the acquisition of Aimmune Therapeutics, adding to its double-digit underlying organic growth as demand for vitamins, minerals and health supplements continues to rise. Health Science sales are set to hit CHF 4 billion by the end of this year against CHF 2 billion
in 2017.

Nestle has also become a popular ESG (environmental, social and governance) investment due to its commitment to make all its packaging recyclable or reusable by 2025 and to spend CHF 2 billion to boost the market for food-grade recycled plastics.

Quality growth at an attractive price

Full year organic sales growth in 2020 is expected to be in the range of 3% to 3.5%, similar to 2019, which for a global business is outstanding given the impact of Covid on the world economy.

Analysts at Berenberg expect organic growth to top 4% this year, albeit with a degree of quarterly volatility. Moreover, margins and returns on capital are set to improve thanks to a better product mix and a reshaped portfolio.

The shares have lagged the market for the last six months,
in part due to a recovery in cheaper ‘value’ stocks late last year, and trade on a forward price to earnings ratio of 22.7 based on consensus forecasts.

To us this represents an excellent opportunity to buy a genuinely world-class business at an attractive price for the long term.

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