We're sticking by our fair value estimate as the firm's results are in line with our thesis of constrained growth.
We reiterate our CHF 79 fair value estimate and wide moat rating for Nestle
, despite the firm's underwhelming first-quarter sales update. Organic growth of 2.3% is below our full-year forecast, but that is to be expected, given the greater number of selling days a year ago and the later timing of Easter this year. Nevertheless, the current growth rate is a sequential slowdown from last year's 3.2% growth and is far short of the old “Nestle model” of 5%-6% growth, underlining our thesis that medium-term growth will likely be constrained by weak price/mix.
Philip Gorham, CFA, FRM, is director of equity research for Ibbotson Associates Japan,subsidiary of Morningstar.
The 2.6% organic growth rate comprised 1.3% volume growth and just 1.0% pricing, both below historical norms. On the volume side, we think most of the pressure is cyclical, with some growth markets, such as Latin America, still in negative territory. We forecast 2.5% volume growth in the Americas, or Zone AMS, in the medium term, and expect regional volumes to recover when local economies improve. On the other hand, Asia, Oceania, and sub-Saharan Africa, or Zone AOA, posted healthy 3% volume growth, and the Waters segment produced respectable volume growth of 1.5%.
Pricing is suffering from some cyclical weaknesses, evident in the 0.0% price/mix impact in Europe, the Middle East, and North Africa, or Zone EMENA, and just 0.5% in Nestle Waters. We think the absence of inflationary pressures in some of these markets means there is a macroeconomic element to this weakness, and we expect pricing to improve marginally in 2017 if economic growth continues to improve. However, Nestle’s current performance does little to refute our thesis that the big food brands' pricing power is waning, and will likely weigh on medium-term organic growth. Consumer tastes and preferences are fragmenting, with new entrants meeting the demand for artisanal and niche products, and unbranded products are taking share in many markets. This is creating a more intense pricing environment that we believe will likely continue in the long term.
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