Tide about to turn for shares in this global powerhouse

We all either use or know well some of this company’s famous brands, and a shock downturn has left the stock looking good value, believes analyst Rodney Hobson who thinks the bottom has been reached.

11th September 2024 08:21

Rodney Hobson from interactive investor

Life has been really tough for Nestle SA (SIX:NESN) since the end of 2021 but there are hopes that a new chief executive will turn the Swiss food giant round. This is admittedly taking a lot on trust, but the long slide in the share price could at last signal a buying opportunity.

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Nestle announced towards the end of August that chief executive Mark Schneider would be stepping down. In little over a week he had been replaced, so there is no doubt that he was ousted with hardly a thank you for his eight years at the helm. His fellow directors had clearly had enough after seeing the share price slump by more than 30% from a peak of SFr127 (£115) to below SFr90, so they decided not to wait until his replacement can be approved by shareholders at the AGM next April.

Source: interactive investor. Past performance is not a guide to future performance.

That replacement is Laurent Freixe, an insider who at least guarantees some degree of continuity and stability rather than disruption at a critical junction. Freixe joined Nestle’s French arm nearly 40 years ago and served as head of the Europe zone for six years before taking over in the Americas. After the zones were restructured, he became chief operating officer for Latin America. He probably knows more about Nestle than anyone else. In contrast, Schneider had been the first outsider in nearly 100 years.

The clock started ticking a month before Schneider was ousted when Nestle lowered its guidance for 2024 after reporting disappointing sales and profits for the first half. Profits were stagnant at SFr5.78 billion while sales slipped 2.7% to SFr45.05 billion. Prices had come under pressure despite the group having a range of iconic brands such as KitKat chocolate, Purina pet foods and the coffee that bears the company’s name.

Nestle has in the past been able to push through price increases to drive growth in the top line. For much of this year it has been relying on promotions that may well continue for the foreseeable future.

The group lowered its guidance for full-year organic sales growth, although it still expects to achieve 3% after a modest improvement in the second quarter. This is the second downgrade this year.

At least Freixe will be able to put some recent misfortunes behind him. The disastrous 2020 acquisition of peanut allergy drug maker Palforzia, a doubtful fit from the start, was sold last year after incurring a $2.1 billion impairment charge. There was a water purification scandal in France, while disruption to the IT system in the health science business caused supply shortages for several months.

The hope now is that a shock downturn in the first quarter has already been reversed. That is far from guaranteed. The United States is Nestle’s biggest market and some major competitors there are reporting that less well-off consumers are starting to struggle.

The price/earnings ratio is 20, not excessive for a company of this quality and lower than it has been in recent years. The yield is quite attractive at 3.4%. The dividend was raised again last year and if that is repeated, as is likely, that will make 30 years of rising payouts.

Hobson’s choice: With sales spread across nearly 200 countries, this is a company selling some of the best brands in the world across one of the widest geographic spreads. I gave a cautious buy recommendation at SFr95 in March but now feel even more confident that the bottom has been reached and that the tide will turn. Catching falling knives is a dangerous game but now is surely time to grasp the handle rather than the blade.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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