* Source of opportunity
2014 is likely to be the second successive year that Nestle fails to deliver the
Nestle model of 5%-6% organic growth owing to weak consumer demand
and adverse category exposure. Staples inputs have fallen 15% since July
and we expect this to further constrain growth without benefiting EBIT
margins. We expect 2015 to be worse than 2014 forcing the company to
recalibrate the Nestle model at a lower level of growth. We reduce our EPS
estimates 9%/13%/16% over 2015/16/17E and are now 3%/3%/6% below
I/B/E/S consensus. Nestle is European Staples in a microcosm: expensive,
slowing and due for a de-rating. We reduce our rating to Sell (from Neutral).
* Catalyst
Further deflation in commodity prices and increased concerns surrounding
a deflationary macro environment across DMs will further increase pressure
on Nestle pricing. Nestle is due to report FY results on February 19, 2015,
when the company is likely to give an update on its commodity basket and
deliver guidance for FY15. In the past this has consisted of repeating the
Nestle growth model of 5%-6% organic sales growth, however we expect
4.2% growth in FY15, and believe that outlook could be lowered to 4%-5%.
* Valuation
Nestle trades on a 2015E P/E of 20.4x, a 6% premium to the Staples sector,
at the same time as offering below average growth: 8% average EPS growth
over 2015-17E vs. European Staples at 10%. Our 12 month price target of
SFr65 (from SFr70) is based on our unchanged P/E methodology applying
16.8x to 2016E, to reflect our organic EBIT growth expectations, consistent
across our Staples universe.
* Key risks
Risks include: an improvement in commodity prices helping to alleviate
deflationary pressures; underlying improvement in one of Nestlé’s key
markets; and favourable M&A.