EARNINGS PREVIEW: Food Price Rises Are Nestle's Biggest Concern
11 Februar 2011 - 4:29PM
Dow Jones News
ZURICH (Dow Jones) -Nestle SA (NESN.VX) is expected to post
steady sales and earnings growth when it reports full-year figures
Feb. 17, but investors will be more interested in the company's
outlook as it heads into tougher market conditions amid rising
commodity costs in 2011.
Sales on a continued basis are forecast to rise to 104.51
billion Swiss francs from CHF100.58 billion in 2009 according to a
company survey of 30 analysts.
Net profit is also predicted to increase to CHF10.02 billion,
from CHF9.26 billion a year earlier.
But the market's primary focus will be on how the world's
biggest food company by sales, which numbers Nescafe, Maggi stock
cubes and Perrier among its brands, will deal with the escalating
price of input materials.
In January the Food and Agriculture Organization of the United
Nations Food Price Index rose for the seventh consecutive month,
and reached its highest level in both real and nominal terms since
the index was backtracked in 1990.
The FAO Cereal Price index, which includes staples such as rice,
wheat and maize, was particularly high, rising 3% from December and
reaching its highest level since July 2008.
Further rises are expected this year.
Rival food company Unilever Plc (UL) has already said it has
been hit by the soaring cost of commodities like palm oil, which
hit its margin for the fourth quarter of 2010. Earlier this month
the Anglo-Dutch company signaled higher input costs are not going
to go away.
So far Nestle management has not committed to large scale
pricing action to deal with the rising costs.
"You don't price on the peaks and ups and downs. You have to
take a step back, get a perspective and react accordingly," Nestle
CEO Paul Bulcke told Dow Jones Newswires earlier this month.
Meanwhile the slowdown in economic growth and continued
unemployment make it more difficult to pass on raw material price
rises to consumers.
But on the plus side, Nestle is seen by many analysts as a safe
haven in troubled times, with a good track record of managing cost
increases.
"When input prices increased in 2007 and 2008, Nestle increased
prices and were able to increase their top line and their margins
as well," said Jean-Philippe Bertschy, an analyst at Zurich private
bank Vontobel.
He highlighted how Nestle is a slightly different company to
2007, with greater contributions from its nutrition and Nespresso
premium single serve coffee businesses whose customers are less
sensitive to price rises.
The company is also diversified, with no one product line
responsible for more than 10% of sales, and no country bar the U.S.
accounting for more than 10% of sales.
Analysts still think Nestle will meet its target of 5% to 6%
organic growth for 2010 and 2011.
They also agree it is likely to increase its EBIT margin,
although at a lower rate than previously. In 2009 Nestle achieved
an EBIT margin of 13.1% on an ongoing basis, down from 14.3% the
previous year which included the Alcon eye-care business which it
has since sold.
Analysts expect 13.5% in 2010 and 13.8% in 2011.
Investors will also be hoping for announcements about the
company's share buyback program.
With around half of the current CHF10 billion scheme already
committed and the program due to be completed by the end of 2011,
hopes are high for another round of buybacks, helped by Nestle's
large cash pile and lack of large acquisitions.
Overall, analysts think Nestle can meet its targets and keep its
model running, but it is going to get harder.
Exane BNP Paribas analyst Jeff Stent said: "There is no doubt
that 2011 is going to be tough for food companies and I would not
be particularly keen on buying large food companies. But if I
bought one, it would be Nestle."
-By John Revill, Dow Jones Newswires; +41 43 443 8042 ;
john.revill@dowjones.com
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