Nestle Investor Says Stock Too Cheap After Worst Year on Record

(Bloomberg) — Nestle SA’s slumping stock valuation has made it irresistible for money manager J. Stern & Co., which has been increasing its holdings in the face of widespread market concern about the pace of a turnaround at the Swiss consumer-goods giant.

The shares have fallen 25% this year, on track for the biggest annual drop on record, and that makes them “far too cheap,” Christopher Rossbach, chief investment officer of J. Stern, said in an interview.

“The time to buy a quality company like Nestle is now, when investors have lost faith in it,” said Rossbach, whose World Stars Global Equity fund has been adding to its Nestle holdings throughout the course of the year.

For a company long associated with stability, it’s been a turbulent 12 months. Just a few weeks after reducing its sales guidance in the summer, Nestle ousted its chief executive officer. Struggles with product innovation have compounded a tough macro-economic environment and concerns about how weight-loss drugs might affect eating habits.

But with Nestle now trading at a discount of about 25% to its average valuation over the past decade, some market participants say the selloff has gone too far. Analysts see the stock rising more than 20% on average from current levels, according to 12-month price targets compiled by Bloomberg.

Investors are keenly watching how CEO Laurent Freixe, who took over in September following the ouster of his predecessor Mark Schneider, will revamp the business. Not long after he started, Freixe further reduced the company’s target for organic sales growth this year and said he’s reviewing Nestle’s portfolio of products — though hasn’t announced any disposals. 

For Goldman Sachs Group Inc. analyst Olivier Nicolai, Nestle is in the early stages of a turnaround story. Although this will take time, he sees cash flow improving and notes the “secure and attractive” dividend yield in the meantime. 

“Under the new CEO, Nestle will focus on more targeted product innovation and will be run as a more integrated company rather than a holding,” Nicolai wrote in a note this week. “Cash flow improvement could imply a return to share buybacks in 18 months.”

Among analysts tracked by Bloomberg, 14 have a buy rating or equivalent, 14 recommend holding the stock and one says sell. Some are waiting for Nestle to deliver on its targets before turning more positive.  

Stifel analyst Cedric Norest said Nestle’s turnaround “remains a show-me story,” while Citigroup Inc.’s Cedric Besnard sees “little scope” for the stock to re-rate or consensus expectations to increase “until the transition phase is over.” Morgan Stanley’s Sarah Simon, whose price target of 76 Swiss francs is the lowest among analysts tracked by Bloomberg, said the company’s mid-term guidance probably won’t be achieved before 2027. 

Nestle doesn’t comment on its own share performance, a spokesperson said in response to a Bloomberg News query. He instead pointed to last month’s investor event where the company outlined its strategic plan, “which forms the foundation for our value creation.”

And with the shares hovering around their lowest level since February 2017, market expectations may have now factored in the worst. 

“The selloff of Nestle has been overdone and indiscriminate,” said Jon Cox, an analyst at Kepler Cheuvreux, adding that the bulk of the company’s product portfolio is focused on coffee, pet care and nutrition. “We are not about to stop drinking coffee, feeding our pets or giving our kids infant formula or taking vitamins ourselves.”

–With assistance from Dasha Afanasieva, Michael Msika, Kwaku Gyasi and Paula Doenecke.

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