A Sweet Spot for Nestlé?

A Sweet Spot for Nestlé? - at www.moneyweek.com, the best of the international financial media

"Nestl-bashing has been a popular pastime this year" says John Foley on Breakingviews.com. In June the group had to pull two brands of powdered milk from the Chinese market after authorities found too much iodine in the products, and corporate governance has been in the spotlight too, after chief executive Peter Brabeck added the job of chairman to his duties in April.

But the company has finally "produced some good news." Underlying sales growth in the first half of 2005 came in at 5.2%, the first time the group has met its long-term growth target of 5%-6% since the first quarter of 2004.

Net income rose to $2.9bn, from $2.2bn last year as strong growth in the US, Asia and emerging markets made up for a "sluggish" 1.5% in Europe.

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The group seems to be "doing all the right things" cutting the amount it spends on distribution, and increasing spending on marketing.

But "it was high time" for Nestl to perform, says Lex in the FT. Profits were also boosted by lower taxes, easy comparatives, and its 75% holding in fast-growing eye-care company Alcon.

However, operating margins were less impressive, rising just 0.1% to 12%, amid higher plastic and milk costs. "Indeed, underlying margins were squeezed cruelly" at its core products.

A move to focus on high-margin goods, like its Nespresso coffee, has helped for the moment, but leaves it more vulnerable to slower consumer spending than peers.

With shares already trading at more than 17 times expected 2005 earnings, the group doesn't look "a particularly attractive defensive bet.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.