Nestle has credentials to benefit from recession

Fri Apr 3, 2009 1:56pm BST
 
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By David Jones - Analysis

LONDON (Reuters) - Nestle (NESN.VX), the world's biggest food group, has the credentials to exploit the recession and extend dominance of its sector at the expense of its European peers.

As the continent's top food groups battle a slowdown this year, Nestle's resilience and reliability -- and the sheer range of products offered by the Vevey-based maker of Nescafe coffee and KitKat chocolate bars -- place it in a favourable light for analysts.

Many rank it ahead of Danone (DANO.PA), Cadbury (CBRY.L), and Unilever (ULVR.L) (UNc.AS).

Cadbury is currently the top rated of these food stocks, trading at 14.8 times 2009 forecast earnings, reflecting its recession-resilient nature with confectionery having low exposure to private labels and a low risk of trading down to cheaper products.

Shares in Nestle and Paris-based Danone trade around 12.9 times 2009 forecast earnings with Anglo-Dutch Unilever, for long the underperformer, trading at 11.3 times. UBS analyst Alan Erskine says Nestle is his most preferred stock while Cadbury and Danone shares are his least preferred in the European food and consumer goods space. "Nestle remains our preferred name...; it offers the best volume growth, the strongest balance sheet and a management team not distracted by a big restructuring programme or acquisition integration," he said.

Andrew Wood at Bernstein Research says Nestle is also his top pick across the sector, based on the Swiss group's top-line sales growth, operating efficiency, cash generation and management quality.

"We are expecting Nestle to be top-of-class, or close to it, on each of these 4 metrics from 2009-2011...which in our view should drive a sizeable premium against its peers, whereas Nestle currently trades at closer to parity," he said.

Nestle impressed investors by beating forecasts to see 2008 underlying sales grow 8.3 percent and, despite prospects of a tough 2009, it forecast annual sales growth of at least approaching 5 percent compared to its long-term target of 5 to 6 percent.  Continued...

 
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