Nestle Q1 beats forecasts as outlook brightens

Nestle Q1 beats forecasts as outlook brightens

Zurich/London: Nestle, the world’s biggest food group, beat forecasts with a 6.5% rise in underlying first-quarter sales and was upbeat about its 2010 prospects as the economic recovery starts to kick-in.

The maker of Nescafe coffee, Gerber baby food and KitKat chocolate bars saw growth from all its regions and categories as it repeated its 2010 growth targets on Thursday to look for better sales and profit margin growth compared to 2009.

Analysts said Nestle was boosted by surprisingly good growth in Western Europe and its ability to raise prices in slowly recovering economic conditions, while confectionery and ice-cream sales gained from an early Easter this year.

Nestle shares rose 2.4% to 53.3 Swiss francs by 0840 GMT as the strong start to the year offset some disappointment over Nestle’s caution in not raising its 2010 targets.

“It might not be controversial to have Nestle as our favourite food stock but on these numbers its fully justified," said analyst James Edwardes Jones at brokers Execution Noble.

European food groups are seeing a pick-up in growth in early 2010 helped by recovering world economies and lower commodity costs. Danone posted first-quarter growth of 7% while Unilever reports next week.

The Swiss group reported its food and drinks business grew sales 5.1% in Europe boosted by good growth in Britain, France and Germany with Nescafe and Maggi soups star performers. Growth in emerging markets topped 10%.

“We expect consensus estimates to be revised upwards and note a high likelihood that consensus organic growth numbers could reach ‘Nestle model’ levels in 2010, another sign that the recession seems over," said Andreas von Arx at brokers Helvea.

Currently, analysts are looking for underlying sales to rise 4.7%, slightly below the long-term Nestle model which looks for growth between 5 and 6%.

The first-quarter 6.5% rise in underlying or organic sales beat an average estimate of 5.1% from a Reuters survey of 10 analysts, with overall group sales rising 4.4% to 26.3 billion Swiss francs ($24.65 billion). Core food and beverage underlying sales grew 6.1%.

The Swiss group stuck to its forecast to see higher growth in 2010 from its food and beverage business compared to 3.9% growth in 2009 and for a rise in 2010 operating or EBIT margins in constant currencies from 2009’s 14.6%.

“Our strong sales performance in the first quarter confirms we are capturing opportunities in our different growth pillars, both in emerging and developed markets, even in a global economic environment which remains challenging," said chief executive Paul Bulcke in a results statement.

Analysts say Nestle shares should make further gains after underperforming the DJ Stoxx European food and beverage index by 8% this year due to concerns over its stake in the world’s biggest cosmetics group L’Oreal and fears of rising commodity prices later this year.

“We believe that a continuation of the strong sales performance into H1, matched with good margin growth and excellent EPS growth should drive Nestle’s valuation higher, particularly given it trades at only parity to its peers," said Andrew Wood at brokers Sanford Bernstein.

Nestle is focusing on its core food and drink business which sells Perrier water, Buitoni sauces and Carnation milk after agreeing this year to sell off its remaining stake in US-based eyecare group Alcon.


The Vevey-based group has plenty of firepower with $28 billion from the Alcon sale, and swallowed up Kraft’s North American pizza business for $3.7 billion in January, a deal which helped Kraft sweeten its successful bid for Cadbury.

But Nestle has emphasised its preference for share buybacks, saying that once its 25 billion franc programme was completed in mid-2010 it would launch a further 10 billion franc buyback while keeping quiet about potential acquisitions or buying up Paris-based L’Oreal, where it has a 30% stake.

Chairman Peter Brabeck told the group’s annual meeting this month that Nestle’s interest in L’Oreal is an important issue that it was examining with the greatest attention as part of its global strategy of nutrition, health and wellness. Many analysts expect Nestle to sell the L’Oreal stake eventually.

US chocolate rival Hershey Co reports its first-quarter results later on Thursday. Hershey tried and failed to launch a counter bid for Cadbury, and although controlled by a charity trust many analysts think Nestle may look to eventually takeover Hershey.