Nestle’s shares fell today (18 February) after the world’s largest food maker missed analyst expectations on sales and trading operating profit – and disappointed with its guidance for this year.
The company’s so-called Nestle Model calls for annual sales to grow 5% on an organic basis but the company fell short of that target again in 2015. The group’s forecast for 2016 sales was also lower than its “model”, although some in the analyst community viewed the target for this year as more realistic. Broadly, however, Nestle’s forecasts for 2016 were below what analysts had expected.
Here’s a flavour of how analysts have viewed the KitKat-to-Maggi owner’s numbers.
The take on Nestle’s 2015 results
“An end to a difficult year and the Nestle Model, at least for now. FY15 organic sales growth, at 4.2%, came in on the low side of 9M guidance of ‘around 4.5%’ but in line with Jefferies estimates and consensus. Full-year trading margin was down 20 basis points in reported forex, up ten basis points at constant forex. Consensus was looking for +10bps, which we interpret as a reported figure. Earnings per share was line at CHF3.31. ‘Nestle Model’ sales guidance of 5%-6% didn’t merit a mention in the release” – Martin Deboo, Jefferies.
“Nestle published soft FY15 results. We think that the result mainly disappointed due to the recent development of the operating margins. [There was] a lower operating margin based on a weak performance in high-margin Asia, Oceania and Africa, which posted just an organic growth of 0.5% and trading operating margins down by 80 basis points. The ambient dairy product in China Yinlu continues to suffer. Nutrition organic growth was just 3.1% due to high base and softer pricing in Asia. Positives [include] improvement in organic growth in US frozen dishes with stronger organic growth in all four subcategories and India (revenues of 1.6% of group) as the Maggi product recall is over and products are back on the shelf” – MainFirst’s Alain Oberhuber.
“Top-line in line with expectations, margin below due to one-off charge. Organic growth of 4.2%, split into 2.2% real internal growth and 2% pricing. Excluding Maggi noodles in India, we derive real internal growth of 2.5% and organic growth of 4.4%. This compares to Unilever 4.1% (foods was 1.5%) and Mondelez 3.7%. A mixed bag, with the negative surprise on the operating profit margin, which could have been better flagged with 9M results” – Jean-Philippe Bertschy, Vontobel.
“Nestle’s FY 2015 performance was reasonable, given the challenging environment. For the fourth quarter and second half overall, it was a generally disappointing reporting. Nothing better than average (at best) compared to its peers. We are not accustomed to Nestle being average but it is becoming more frequent. The one major positive, for once, was Zone AOA which returned to reasonable growth in Q4 (+3.4%) after chronic disappointment over many quarters/years…but experience suggests it is too early to call victory with this region. Most other businesses disappointed” – Sanford Bernstein’s Andrew Wood.
“Nestle reported 2015 results that were lower than expected. While organic sales growth was in line with consensus at 4.2%, its trading operating margin was lower amid weakness in Asia caused by the ongoing fall-out from the Maggi product recall in India. It missed net profit expectations by 8%” – Jon Cox, Kepler Cheuvreux.
How is Nestle’s guidance for 2016 being viewed?
“Outlook was soft as Nestle expects FY16 organic growth will be similar to FY15 – i.e. +4.2% versus our and market expectation of +4.7%, mainly due to softer pricing. Operating profit margin is expected to increase at constant currency. However, the current market expectation of a margin improvement of 50 basis points seems too challenging. We expect market earnings estimates to be reduced by around 4-5% to our level. Based on recent developments at the company, Nestle’s growth is now in line with its main peers – Danone and Unilever – but it also has less potential for margin expansion.” – Oberhuber.
“Organic growth in line with FY15 at 4.2%, however with softer pricing. Consensus is at 4.7%. We continue to believe that Nestlé has to accelerate its optimisation of capital allocation, divesting under-performers, and re-allocating the resources to the champions. The competition has increased in the past months, both on local and global levels” – Bertschy.
“Guidance for 2016 was also below our expectations. We had expected top-line growth guidance of “around 5%” with margins and EPS growth in constant FX…but the top-line guidance was ‘similar to 2015’ which was +4.2%. There was also no announcement of a new buyback plan. We saw no mention of the Nestlé Model, which was probably a wise move…although we do not consider that this model is dead for the medium-term. Before this reporting we expected an improvement in performance in 2016, with 4.8% organic growth, 25bps margin growth and 8% EPS growth, which now looks slightly optimistic. With disappointing results and lacklustre guidance for 2016, we would expect a negative stock reaction today” – Wood.
“It said organic sales in 2016 would be in line with 2015 – and there was no mention of its former medium-term 5-6% organic sales growth target. It said pricing would be even tougher in 2016 given the deflationary environment. Consensus is for 4.7% organic sales growth and while it can make up margin as India recovers we assume estimates will fall” – Cox.
“The shares are off 3% on lowered 2016 sales guidance that is below consensus. We welcome the move to more sensible and achievable top-line targetry, and applaud the good work on cash generation. Nestle is guiding to 2016 organic sales in line with 2015 and is cautioning in quarterly volatility around this number, with the lapping of the Maggi withdrawal expected to impact H1. We view guidance as sensible and achievable (we had been forecasting 4.3%) but it implies downgrades relative to consensus +4.7%. But what’s missing from the equation is margin progress, where we were disappointed by the lack of any firmer commitment, given potential tailwinds in 2016. With growth expectations lowered, the focus of questioning on the call was on margins, with voices in the market clearly looking for a commitment to zero-based budgeting along the lines of Unilever, Diageo, Mondelez International and Kraft Heinz. Nestle insists its ongoing commitment to ‘business excellence’ will suffice here, but we were disappointed not to hear something more decisive. We also have a concern that focus on constant fx margins (rather than the reported fx margin that shareholders actually get) will make NESN inattentive to reducing the CHF cost base. All that said, pricing vs. commodities should continue to be favourable in 2016 and many of 2015’s headwinds shouldn’t recur. Something to noodle on, then” – Deboo.