On Tuesday, Redburn-Atlantic made an adjustment to the financial outlook for Nestle SA (SIX:NESN:SW) (OTC: NSRGY (OTC:NSRGY)) shares, reducing the price target from CHF 85.00 to CHF 81.00. The firm has decided to maintain a Neutral stance on the stock despite this change.
The revised price target is a result of a detailed analysis by Redburn-Atlantic, which incorporated a variety of factors, including the company's growth prospects and market positioning. According to the firm's estimates, Nestle is expected to achieve a 4% earnings per share (EPS) compound annual growth rate (CAGR) over the next three years.
However, the stock is currently trading at 18.4 times one-year forward price-to-earnings (P/E), which is slightly higher than its competitors, despite offering slower EPS growth.
The analyst at Redburn-Atlantic highlighted the specific risks associated with Nestle, pointing out the company's significant exposure to the coffee and chocolate markets. These sectors are considered to have higher near-term risks, and there is also uncertainty surrounding potential announcements at the upcoming Capital Markets Day (CMD).
The new stock price target of CHF 81.00 is based on a ten-year discounted cash flow (DCF) model. This model assumes a weighted average cost of capital (WACC) of 7.1%, a 1.6% per annum post-currency sales growth, a 17.4% operating margin in the tenth year, and a return on invested capital (ROIC) of approximately 15%, with long-term growth projected at 2.5% per annum.
These factors culminate in a valuation of 17.8 times one-year forward P/E and 15.7 times enterprise value to earnings before interest and taxes (EV/EBIT).
Despite the price target reduction, Nestle's stock continues to offer an approximate 4% dividend yield. However, the total potential shareholder return, considering the new price target, is estimated at -2%. Redburn-Atlantic's Neutral rating remains unchanged, reflecting a cautious stance on the company's stock performance in the near term.
In other recent news, Nestle SA has been the subject of various analyst ratings and internal changes. RBC Capital maintained its Sector Perform rating for Nestle, following the company's updated guidance for the year, which indicated a slowdown in organic sales growth and a stable earnings outlook.
Concurrently, Jefferies held its rating on Nestle's shares amidst the company's recent CEO transition, which has led to market anticipation of potential risks impacting both the third quarter and the full year 2024 outlook.
Morgan Stanley (NYSE:MS) downgraded its stock rating for Nestle from Equalweight to Underweight, citing concerns over execution risks and a lack of flexibility in the balance sheet. In contrast, Citi reaffirmed its Buy rating on Nestle, in the wake of the company's anticipation of a new CEO, which could potentially lead to strategic changes within the company.
In a significant leadership change, Nestle announced the appointment of Laurent Freixe as the new CEO, succeeding Mark Schneider. This decision was a mutual agreement between the board and Schneider. These are recent developments that have shaped the current status of Nestle.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Redburn-Atlantic's analysis of Nestle SA. The company's market capitalization stands at $256.59 billion, reflecting its significant position in the Food Products industry. Nestle's P/E ratio of 20.24 aligns closely with Redburn-Atlantic's forward P/E estimate of 18.4, indicating that the stock may indeed be trading at a premium compared to its peers.
InvestingPro Tips highlight Nestle's strong dividend history, having raised its dividend for 28 consecutive years and maintained payments for 33 years. This supports the analyst's mention of Nestle's attractive 4% dividend yield. However, the company's revenue growth has been negative, with a -3.55% decline in the last twelve months, which may contribute to the cautious outlook.
The stock is currently trading near its 52-week low, with a price that is 84.74% of its 52-week high. This could present an opportunity for investors, especially considering that InvestingPro's fair value estimate of $105.38 suggests potential upside from the current price of $99.65.
For readers interested in a more comprehensive analysis, InvestingPro offers 8 additional tips for Nestle SA, providing a deeper understanding of the company's financial health and market position.
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