Nestle reports strongest first quarter since 2016 on pricing

(360b, Shutterstock)
(360b, Shutterstock)

Nestle SA reported the strongest start to a year since 2016 as the world’s largest food company raised prices and its underperforming US frozen-food brands Hot Pockets and Stouffer’s returned to growth.

Revenue climbed 3.4% on an organic basis in the first quarter, as Chief Executive Officer Mark Schneider beat the 2.8% analyst consensus by the biggest margin since he started leading the Swiss company in 2017.

The stock, which set a record earlier this month, rose 1.2% Thursday morning.

“Nestle continued to deliver,” said Jean-Philippe Bertschy, an analyst at Bank Vontobel. He pointed to measures taken last year that are starting to pay off, such as the revamp of US frozen food.

Nestle achieved both better-than-expected pricing and volume growth, bolstering confidence that Schneider will succeed in accelerating sales growth again in 2019 after an extended six-year slowdown. Schneider has been revamping Nestle, having signed $14 billion of deals in 2018, including the purchase of licenses to sell coffee products under the Starbucks brand. The food giant has also been trying to fix or sell underperformers, with a sale for its Herta lunch-meat unit possibly coming by mid-year and its dermatological business by year-end.

“This is a quality beat, which we believe is a clear support to the portfolio management story,” wrote Cedric Besnard, an analyst at Citigroup Global Markets.

The pricing gain of 1.2% was the biggest in 10 quarters as the KitKat maker passed higher raw-material costs on to consumers, especially in Brazil and the US. The businesses that were most hit by inflation include bottled water as higher oil prices make plastic and transport more expensive. Still, Europe and parts of the Pacific region such as Japan are suffering from deflation.

Brazil improved to double-digit growth, while the US was boosted by Purina. Nestle’s ailing frozen-food unit in the US returned to growth in the quarter, led by Hot Pockets and Stouffer’s. Some investors have been pushing for a sale of those underperforming brands.

Nestle’s Asia Pacific business “had a subdued quarter and waters remains insipid, a problem Nestle needs to fix,” said Martin Deboo, an analyst at Jefferies. Asia may have been impacted by an earlier Chinese New Year, while sales of Nestle’s low-end water brand Pure Life dropped.

Nestle Skin Health had double-digit organic growth in the quarter, which could help buoy the price the food company may get for that unit, according to Alain Oberhuber, an analyst at MainFirst Bank. The entire business could fetch $8 billion to $10 billion, people familiar with the matter have said.

Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Yes. We need the money.
11% - 1339 votes
It depends on how the funds are used.
73% - 8746 votes
No. We should have gotten the loan elsewhere.
16% - 1928 votes