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On Friday, JPMorgan reiterated a Neutral rating on Nestle SA (SIX:NESN:SW) (OTC: NSRGY (OTC:NSRGY)) stock with a price target of CHF85.00. The firm's analysis suggests that despite a significant reduction in consensus earnings per share (EPS) expectations and the stock's current discount compared to its European peers, there is no compelling positive risk/reward scenario to adopt a more constructive stance on the shares at this time.
The banking giant pointed out that the market might be underestimating the difficulties Nestle (NS:NEST) could encounter in achieving real internal growth (RIG), especially in the fourth quarter of 2024 and throughout 2025. JPMorgan forecasts a meager 0.4% RIG for 2025, which is substantially lower than the +1.4% consensus.
The concerns are based on potential negative RIG in the coffee and confectionery segments due to high single-digit to low double-digit price risks, a slowdown in pet food sales, and a generally tough consumption environment, as recent weak Nielsen data has shown.
JPMorgan also highlighted risks to Nestle's earnings, primarily due to margin pressures. Inflation in the cost of goods sold (COGS) for fiscal year 2025 is expected to continue climbing, with the latest estimates around 10%, compared to the 6% previously modeled by JPMorgan. This could lead to lower-than-expected earnings per share for 2025 if high COGS inflation persists, potentially bringing the like-for-like sales growth closer to 4% and posing about a 4% downside risk to the EPS forecast for 2025.
Furthermore, the valuation of Nestle at 14.7 times its projected 2025 price-to-earnings (PE) and 11.3 times its enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) for 2025 is seen as justified. This is due to slower volume growth, potential EPS declines, and limited cash returns, with JPMorgan estimating Nestle's total shareholder return (TSR) for fiscal year 2026 at the lower end of the Food/Home and Personal Care (HPC) sector.
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