Nestle Earnings: Real Internal Growth Ahead While Top-Line Guidance Looks Conservative

Nestle NSRGY reported first-quarter results that included strong organic growth of 9.3% (real internal growth, or RIG, of negative 0.5% and pricing up 9.8%), ahead of company-compiled consensus estimates of 7.2%, driven predominantly by better-than-expected RIG (down 2% expected). From a regional perspective, RIG (volume and mix effect) stood well in Asia, Oceania, and Africa (up 1.3%) and Latin America (down 0.6%), with Europe, North America, and China down 1%, 0.8%, and 0.8%, respectively. At the product category/business level, along with water this quarter, prepared dishes and cooking aids as well as milk products and ice cream continued to exhibit the weakest RIG, down 7.3%, 4.3%, and 3.7%, respectively. We reiterate our view that despite some weak RIG numbers in noncore categories and close to 10% pricing contribution, flat to slightly negative RIG at the group level is a best-in-class performance in fast-moving consumer goods, driven by continued resilient performance from core categories (petcare, nutrition, coffee).

Nestle confirmed organic growth guidance of 6%-8% and cautious guidance on margins at 17%-17.5%. We believe that if Nestle can carry this first-quarter momentum into the second quarter, organic growth guidance for fiscal 2023 might need to be raised with the first-half release. This was a strong all-around print for the first quarter, with management defending weak Nespresso RIG numbers (down 1.1%) by pointing to the mid-single-digit organic growth coming from the Nespresso ecosystem, part of which is reported under the powdered and liquids category. We maintain our CHF 109/$113 fair value estimate and wide moat rating. We plan to increase our organic growth forecast for 2023 and maintain our margin forecast (17.2%, within guidance) to reflect upbeat organic growth guidance, but we don’t expect a material change to our fair value estimate as a result of these changes. The shares appear fairly valued.