Nestlé best placed for balanced growth in 2010

The world's biggest food group Nestlé looks well placed to show balanced growth between volume and price in 2010 and outperform its two arch European rivals in a year of likely sluggish economic recovery.

The Vevey, Switzerland-based maker of Nespresso coffee and Kitkat chocolate bars showed faster 2009 growth than Unilever plc and Danone without the short-term remedy of price cuts, making it a favourite among analysts.

Some 29 analysts out of 39 surveyed by Reuters see Nestlé shares as a "buy" or "strong buy" and say its shares look cheap compared to its two rivals based on its forecast performance and its bumper returns from dividends and share buybacks.

While Unilever and Danone had to cut prices in the latter half of 2009 to get underlying sales growth, Nestlé saw growth from higher prices and volumes, placing it at an advantage if commodity prices start rising again in the second half of 2010.

Analyst Andrew Wood at brokers Sanford Bernstein expects 2010 will be a strong year for Nestlé as it raises media spending, commodity prices start subdued and it faces easier comparisons after a tough time in the early months of 2009.

"We believe Nestle is the strongest and most balanced company in the European food group. We have seen excellent operating results from Nestlé in recent years and we expect this to continue into the medium term," he said.

Nestlé's food and beverage underlying sales grew 3.9 per cent in 2009, ahead of Unilever's 3.5 per cent and Danone's 3.2 per cent.

But its shares have not won a significant premium, trading on 16.8 times 2010 forecast earnings, according to Thomson Reuters data, similar to Danone and ahead of Unilever on 15.8.

Analysts say one of the main worries with Nestle is poor communication with investors, highlighted by an ambiguous acquisitions strategy message and illustrated by a lack of clarity over its stake in Paris-based L'Oreal Nestle says it budgets two to three billion Swiss francs for acquisitions each year but then bought Kraft's US frozen pizza business for $3.7 billion in January, and with a bumper $28 billion to come from selling off its remaining stake in US eyecare group Alcon it is unclear how it will use its new-found excess cash.

Nestlé has a 30 per cent stake in the world's biggest cosmetics group L'Oreal but cannot raise this until six months after the death of Liliane Bettencourt, the 87-year-old daughter of the firm's founder and owner of a 31 per cent stake.

Many analysts do not see the logic of Nestlé buying a cosmetics group and would like clarity from Chief Executive Paul Bulcke over his intentions other than to say Nestlé does not "require transformational deals".

Finance Director Jim Singh told investors this week that net debt by 2012/13 will be at the same level of 18.1 billion francs at end-2009. Analysts had expected Nestlé to use some of the Alcon funds to pay down debt; now they assume higher levels of share buybacks and acquisitions.

For 2010, Nestlé says sales growth will beat 2009's 3.9 per cent, with Charlie Mills at Credit Suisse looking for 4.4 per cent made up of 3.2 per cent from volume and 1.2 per cent from price with EBIT (operating) margins up 0.3 points at 12.4 per cent.

"That Nestlé still has a bit of residual pricing is also a positive and testament to the strength of the group's brand equity. The group should enjoy good sales and margin momentum in 2010," he said.

Analysts say with commodity price inflation likely to return in the second half of 2010, it will be more difficult for price-cutting groups to start raising prices.

Nestlé's four per cent plus 2010 target compares with Danone looking for at least five per cent growth, boosted by 2009's price cuts, while Unilever's CEO Paul Polman said he will be doing well to duplicate 2009's 3.5 per cent growth in 2010.