Nestle shares rose on Wednesday after Jefferies upgraded the company's rating to ‘Hold’ from ‘Underperform’. The price target was also raised to CHF 87 from CHF 86 The brokerage said that the company has faced challenges due to a changing environment, but its portfolio is well-positioned for future growth.
Analysts flagged that Nestle's stock has already declined by 10% year-to-date, reflecting a derating of its valuation. While the company aims for 4-6% sales growth, analysts said, “We anticipate the portfolio should command sales growth of c4% midterm, ahead of the 4-year average pre-COVID of 3%.”
Despite the challenges, Jefferies mentions Nestle's strong position in key areas such as coffee and consumer health. The brokerage also suggested that a potential partial sale of the company's stake in L'Oréal (EPA:OREP) could boost its share price.
“With margin progression assumed capped at 17.6% and eroding toward 17% long term, we derive a price target of CHF87,” analysts added.
While short-term benefits arise from US economic stimulus measures like SNAP vouchers and increased pet food demand, the company is vulnerable to broader economic slowdowns.
Long-term concerns include the potential impact of GLP1 medications on a significant portion of its sales.
Additionally, operating margin expansion is hindered by necessary reinvestments, limiting the scope for cost-cutting through reduced advertising and promotional spending due to capacity constraints and a lack of competitive pressure.