Nestle gets rare ‘sell’ rating as Morgan Stanley adds to tide of growing scepticism

NESTLE received a rare negative rating as Morgan Stanley turned bearish on the consumer-goods giant, adding to a recent turn in the tide of analyst opinion.

Shares in the maker of Kit Kat fell as much as 1.2 per cent in Zurich to the lowest since February 2019 after analyst Sarah Simon cut her recommendation to “underweight” from “equal-weight” and reduced her target price to the least among analysts tracked by Bloomberg. 

The stock now has 13 buy-equivalent ratings, 13 “holds” and two “sells”.

This brings the proportion of “buy” calls and the average target price to the lowest in more than five years, indicated Bloomberg data.

Nestle shares are down 10 per cent this year to the close last Friday (Sep 13) as the snack maker struggles to win back shoppers.

The company last month appointed Laurent Freixe as chief executive officer, replacing Mark Schneider, who had been in the role for about eight years. Schneider, once popular among investors, had seen his star fade as growth concerns led to his abrupt exit. 

During Schneider’s tenure, Nestle shares had lagged the European benchmark, gaining 20 per cent compared with a rally of more than 40 per cent in the Stoxx 600 index. The stock had outperformed during his predecessor Paul Bulcke’s reign.

Simon said Nestle may deserve a premium valuation over the medium term, but noted that the stock was already pricing in a turnaround in the nearer term.

She sees potential for high-single-digit or even low-double-digit cuts to consensus expectations about its earnings per share for the 2025 and 2026 fiscal years.

“Our estimates suggest that fiscal year 2025 will be a transition year,” Simon said.

“Put simply, we believe that 2025 price-earnings based valuation already prices in Nestle’s traditional premium. Yet we believe that in fiscal 2025 it will deliver lower organic sales growth than the peer group.”

The analyst noted Nestle’s margin growth since 2017 had come from cutting advertising and fixed costs.

If the company were to step up advertising and promotional spend, she estimated it would create a headwind of 170 basis points to the margin by 2026.

Given commodity pressures in 2025, generating gross margin improvement to offset rising costs “will be challenging”, she said.

She added that while they did not observe a “significant absolute downside” at present, they did not find Nestle appealing against the European Staples or Food indices, where they preferred Danone and Glanbia. BLOOMBERG