UBS has downgraded Nestle from Buy to Neutral in a note Friday, citing challenges in achieving its growth objectives and disappointing quarterly results. The bank also lowered its target for the stock to CHF95 from CHF117.
According to UBS, the Nestle model now appears "increasingly aspirational rather than a realistic objective."
UBS highlighted several concerns following Nestle's fifth consecutive quarterly miss on Organic Sales Growth (OSG). The note pointed out that Nestle's four critical growth engines—Coffee, Petcare, Nutrition, and Nestle Health Science—posted modest growth of around 3%, significantly down from an average of 6.5% over the past six years.
Furthermore, UBS noted "no tangible signs pointing to a rapid acceleration" in these areas, except for a favorable comparison basis in Nestle Health Science.
The analysts also mentioned "significant pricing pressures" amid weak consumer sentiment, leading to increased promotional efforts and investments in price competitiveness, particularly in the US frozen food and China markets.
Additionally, despite some improvement, market share development remained soft, with only 56% of Nestle’s billionaire brands maintaining or gaining market share.
UBS expressed a cautious stance due to Nestle's limited financial flexibility, anticipating gross margin contraction in the second half of the year. This contraction is expected to restrict the company’s ability to support its brand and innovation efforts, making substantial earnings upgrades unlikely in the next six months.
The UBS downgrade also reflects a reduction in long-term growth estimates for Nestle's key drivers and a more moderate contribution from pricing.
UBS has adjusted its earnings per share (EPS) forecasts for 2024, 2025, and 2026, down by 1%, 4%, and 6%, respectively.
Finally, UBS also cited lower estimates and revised assumptions for terminal growth rate and WACC as reasons for its re-rating of the stock.