- Trading 57% lower than its ATH and at a 22% discount to its long-term P/E rating. Oversold monthly RSI 27
- Valuation reflects lower guidance and sets a low bar for upside surprises in light of improving sales data
- To benefit from a reversal of the broader overextended cyclicals outperformance vs defensives
Nestlé has seen a c.57% drop in its share price since the all-time high reached at the end of 2021 on the back of a series of disappointing results and an unexpected management change, with the latest CMD also failing to meet market expectations of a compelling new strategy. The market had hoped that Nestlé would sell its underperforming businesses and focus on its most important brands, targeting margin expansion, but instead the company said it would focus on improving the underperforming segments while revising down its long-term growth guidance to 4%+, from 4-6%, and margin expectations to 17%+, from 17.5-18.5%.
The company is now trading at its 2018 lows, and at a 22% discount to its long-term P/E rating, while the market has also cut its 2025 earnings expectations by 25%. In both weekly and monthly timeframes, the stock is also trading at oversold RSI levels that more than price in the lower guidance. We believe the revised targets are likely an effort by the new management to guide the market towards a potential floor in earnings, rather than being a target per se, with the conservative levels setting up an easier hurdle to beat at the next few results.
Looking beyond price, while recent data point to flat topline sales growth in Western Europe and a decline in volume, pricing growth, at 2.5% in October (+1.6% September), suggests that Nestlé is successfully implementing price increases to manage inflationary pressures. Although the company has experienced small market share losses, particularly in Chocolate Confectionery, the resilience of the broader portfolio is evident in regions like China, where it has managed to gain significant market share (+171bp overall), particularly in P&L Beverages, Confectionery, and Nutrition and Health Science, indicating strong consumer demand for certain product categories in one of the world's largest consumer markets. In the US, although still posting volume declines, it has shown sequential improvement, hinting at a potential trough (-1.2% vs -3.0% previously).
The European consumer staples sector has underperformed the STOXX 600 YtD (-4.8% vs +6%), in line with the broader cyclicals outperformance vs defensives in both the US and EU, with the potential convergence in performance to benefit consumer staples in 2025 in a possible cyclical deterioration due to a prolonged elevated rate environment. We look to play the upside on the name with limited risk via June25 82 calls costing 0.9% of underlying (Spot ref. 74.1, Fut. Ref. 72.4).