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Investing.com -- Jefferies upgraded Nestle (NSE:NEST) to Hold from Underperform after the stock’s sharp decline brought its valuation to a near-decade low, but said structural challenges such as weak volume growth, brand investment constraints, and dividend sustainability continue to weigh on the outlook.
The stock now trades at under 16 times forward earnings, with the core business valued at roughly 14.5x after adjusting for Nestle’s L’Oréal (EPA:OREP) stake, a level Jefferies said better reflects near-term risks.
Nestle’s first-half margin guidance miss and its decision to hold back on planned brand marketing spend raise questions about whether the company can rebuild momentum without compromising on profitability, the broker said.
Full-year operating margin is now expected to fall below the first-half level of 16.5%, with Jefferies forecasting 15%.
Jefferies also flagged rising uncertainty around Nestle’s ability to sustain its dividend. Without a CHF 1.5 billion boost from reverse factoring in 2024, dividend coverage would have fallen to just 1.2x.
Any further drag from foreign exchange or margin pressure could force a reassessment, particularly under a new chairman starting April 2026.
Still, Jefferies expects real internal growth (RIG) to improve in the second half, driven by moderated pricing and easier comparisons.
The firm sees RIG reaching 0.7% in Q3 and 1.6% in Q4, ahead of consensus for the full year, assuming Nestle makes necessary pricing adjustments even at the expense of short-term earnings.
Jefferies raised its full-year organic sales growth estimate to 3.7% and nudged its FY25 margin view to 15.7%, but kept its price target unchanged, seeing little scope for re-rating over the next 12 months.