Nestle shares fall as Citi downgrades its visibility rating via Investing.com

Investing.com — Analysts at Citi downgraded shares of Nestle SA (SIX:) from Buy to Neutral on Thursday, citing downside risks to near-term earnings and concerns over slowing organic sales growth (OSG) for the company.

The Wall Street firm also cut its price target on the stock from CHF 105 to CHF 90, implying just a 7% upside from current levels.

Nestle shares fell 1 percent in European trading.

The rating revision is based on analysis that predicts a 6% downside to Nestle’s consensus earnings in fiscal 2025, driven by cost of goods sold (COGS) and pricing constraints, as well as increased operating expenses. Limited return on investment also contributed to the downgrade.

Citi anticipates that Nestle will face margin pressure, forecasting a margin of 17.3% for fiscal 2024 and 16.4% for fiscal 2025, which is below the company’s guidance of 17.5-18.5% and consensus margin estimates.

“Assuming the new CEO may want some reinvestment margin, we believe the company can upgrade its FY25 target to a range of 16-17%,” Citi analysts said in a note. “Our new FY25 EPS is 6% below consensus.”

Citi also notes that Nestle’s recent underperformance may be related to category dynamics rather than underinvestment, as the company’s advertising and promotional spending is considered adequate.

“Our category growth leverage analysis suggests that during COVID, Nestlé’s category portfolio outperformed peers by 100 bps, but has now completely canceled out, even reaching a projected 20 bps underperformance in 2024 … then aggravated by specific problems at the level of the company’s OSG”, the note states.

“However, category growth leverage, in line with peers, marks a simple return to 2015-2020 levels and an OSG of c4%, rather than a 5-6% range, in in line with Danone, it can be the real Nestlé algo,” he adds.

Therefore, an increase in brand endorsement may not be enough “to move the needle” in the short term, analysts said.

While a portfolio overhaul could provide a quicker solution to Nestle’s growth woes, it may dilute earnings per share (EPS) in the short term without share buybacks.

According to Citi, the potential sale of Nestle’s stake in L’Oréal ( EPA: share buybacks that could boost EPS growth but not valuation.