Top management change and a wide-ranging cost-savings programme transform the Nestlé investment case. Not only should margin expansion accelerate but the likelihood of value-creating portfolio change has also materially increased. Over the last 20 years, Nestlé has achieved an annual TSR of 12%. We are now far more confident it can at least sustain this out to 2020. Buy.
Two critical changes. Our previous report on Nestlé in February struck a subdued
tone. Despite our belief in Nestlé’s fundamental strengths, we lacked confidence
management would make the most of them. Today, a cost-savings programme and
Ulf Mark Schneider’s appointment as CEO make for a usefully different outlook.
Expect more on margins. Over-and-above its existing savings, Nestlé expects to
achieve 200bp of savings by 2019. With A&P at a peak and evidence from detailed
margin analysis that Nestlé is under-profiting versus its peers, we are confident a
good portion can be retained. This should enable margins to rise c50bp pa to 2020.
Further value-creation options. Beyond stronger margin expansion, new
management is likely to take a more dispassionate view of the portfolio. Over time,
prospects of further portfolio change and return of surplus capital have clearly
increased. Both of these raise the possibility of a rerating.
Historic TSR can be sustained. We have raised EPS forecasts 1-5% out to 2020.
Using these new estimates and maintenance of Nestlé’s current multiple, a 12%
TSR over the remainder of the decade is achievable (Fig 1). If portfolio options are
fully exploited, the upside could be materially greater. We upgrade to Buy.