Nestlé Feels Commodity Crunch; Missed Sales Expectations Four Quarters in a Row; Nestlé got a serious lift over the past few years from rising commodity costs. It was able to pass these on, and perhaps a bit more, to consumers
August 9, 2013 Leave a comment
August 8, 2013, 2:39 p.m. ET
Nestlé Feels Commodity Crunch
Sales Expectations Have Been Missed Four Quarters in a Row, and a Couple More May Be Needed to Get Back on Track
Nestlé NESN.VX -2.16% shares are a bit like its sugary treats: After providing a burst of energy, they have left investors in a funk. The Swiss food conglomerate fell short of revenue expectations for the fourth quarter in a row Thursday, when it reported results for the three months through June. Nestlé acknowledged that it will be “a stretch” to achieve 5% organic sales growth this year, meaning it may miss its typical 5%-6% target. That suggests Nestlé got a serious lift over the past few years from rising commodity costs. It was able to pass these on, and perhaps a bit more, to consumers. But prices of many inputs like sugar have declined over the past several months. That leads to competitive pressure that erodes pricing power. As Andrew Wood of Sanford C. Bernstein points out, Nestlé’s second-quarter pricing growth of 0.8% was the lowest in a decade. It is hard to guess when commodity prices will rebound. Emerging-market growth, a big driver of commodity demand, has cooled and may take a couple of years to resume.It is hard to identify individual Nestlé brands that could make up the difference. Revenue in the Nespresso coffee division, for instance, rose by a double-digit percentage in the first half. But in a company as large as Nestlé, macroeconomic trends can overshadow such bright spots.
That isn’t to say Nestlé can’t get back on track over time. The company’s brands are fundamentally strong, and it spends a double-digit percentage of revenue on advertising, more than many rivals. Nestlé says it ratcheted up advertising in the first half and directed more money to digital media, which is probably more cost effective.
Even so, competitors have many of the same tools at their fingertips and already are outperforming Nestlé. Danone BN.FR -0.64% reported 6.5% organic sales growth in the second quarter, thanks to a healthy combination of price and volume increases.
Nestlé shares might look tempting after their recent weak performance. The stock has risen a mere 6% this year, compared with an 18% rise for Danone and a 27% increase for PepsiCo.
But Nestlé is no bargain. The stock trades at a free-cash-flow yield of 3.9%, compared with an average of 4.5% for peers, says David Hayes of Nomura Equity Research. Investors should wait awhile longer before taking a bite.
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