ARM in its review of Nestle’s 2014 Full year results recommended a sell for the company’s stock. Nestle released its 2014 full year results showing earnings remained flat year on year and revenue rising 7.7%. Here is an excerpt of their recommendation;
The slowdown in Nestlé’s revenue growth is consistent with our thesis about pressured consumer income underpinning top-line weakness across our coverage universe. Whilst Nestlé’s more defensively themed portfolio continues to sustain scope for positive revenue growth, further pressures in the domestic macro environment would result in a persistence in top-line slowdown over 2015.
Furthermore, management guidance about higher marketing expenses dampens optimism about pass-through to earnings from largely benign commodity price outlook. Although, Nestlé tried to reduce dollar loan exposure in response to prospect of weaker USDNGN, it is unlikely to sizably moderate the exposure over 2015 given historical attachment to dollar borrowings which opens another front for earnings weakness over 2015.
Incorporating the foregoing in our models and raising our risk free rate to capture rising sovereign yields results a 21% moderation in our FVE to N622.8. Nestlé trades at current PE of 29.4x vs. 28.8x mean for Bloomberg Middle East and African peers with last trading price at 24% premium to our FVE which implies a SELL recommendation.
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