Nestle SA Downgraded by Citi Analysts

Citi analysts downgraded Nestle SA (SIX:NESN) shares from Buy to Neutral on Thursday, citing concerns over short-term earnings risks and a slowdown in organic sales growth (OSG).

The Wall Street firm also lowered the stock’s price target from CHF 105 to CHF 90, suggesting only a 7% upside from current levels. As a result, Nestle’s shares decreased by 1% during European trading hours.

The downgrade stems from predictions of a 6% decline in Nestle’s fiscal year 2025 consensus earnings due to rising costs of goods sold (COGS), pricing constraints, and increased operational expenses. Limited returns on investments compounded these issues.

Citi forecasts margin pressures for Nestle, estimating margins of 17.3% for fiscal year 2024 and 16.4% for fiscal year 2025, both below the company’s guidance of 17.5-18.5% and consensus estimates.

The analysts noted that with a new CEO possibly wanting some reinvestment flexibility, Nestle may adjust its fiscal year 2025 target to a 16-17% range, predicting their new EPS forecast to be 6% under consensus.

Citi suggests that Nestle’s recent underperformance might be attributed more to category dynamics than underinvestment, as its advertising and promotional efforts seem adequate.

Their category growth leverage analysis indicated that during COVID, Nestle’s portfolio outperformed peers by approximately 100 bps but has since reversed, estimated at 20 bps underperformance in 2024. They imply that achieving category growth in line with peers could indicate a more realistic projection of 4% OSG rather than the previous 5-6% target.

Analysts concluded that increasing brand support might not yield significant results in the near term. While a portfolio review could address Nestle’s growth challenges more rapidly, it could also lead to short-term EPS dilution without share buybacks.

Citi mentioned that the potential sale of Nestle’s stake in L’Oréal (EPA:OREP) could provide funds but advised that these should ideally be used to enhance organic sales growth rather than merely boosting EPS through buybacks.