UN Unilever NV

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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