Nestle SA, the global giant behind Kit Kat and Nescafe, has been downgraded by Morgan Stanley due to concerns over its future growth prospects.
Analyst Sarah Simon moved Nestle’s rating to “underweight” from “equal-weight,” citing potential challenges the company may face in delivering growth in the coming years.
This rare negative assessment has sparked investor concerns, pushing Nestle’s shares down by 1.2% in Zurich, reaching their lowest point since February 2019.
Nestle downgrade: skepticism about growth ability
Simon’s downgrade includes a significant reduction in Nestle’s price target, now the lowest among analysts tracked by Bloomberg.
Despite the company maintaining 13 buy-equivalent ratings, 13 holds, and two sell ratings, the overall sentiment around Nestle has cooled, with both the proportion of buy recommendations and the average price target dropping to their lowest levels in more than five years.
Simon expressed skepticism about Nestle’s ability to outperform its competitors in 2025.
While acknowledging that the company might deserve a premium valuation over the medium term, she believes its current stock price has already factored in much of the potential recovery. Simon noted:
Our estimates suggest that FY25 will be a transition year.
Simon added that Nestle is likely to deliver lower organic sales growth than its peer group.
Nestle downgrade: margin pressures, cost challenges
Nestle’s recent margin improvements have largely been driven by cost-cutting initiatives, including reductions in advertising and fixed expenses.
However, Simon cautioned that any increase in advertising and promotional spending could erode these gains, potentially impacting margins by as much as 170 basis points by 2026.
The company also faces significant headwinds from rising commodity prices, which Simon believes will make it difficult to improve gross margins.
“Generating gross margin improvement to offset rising costs will be challenging,” she stated as reported by Bloomberg.
Shift in leadership and market performance
The downgrade follows Nestle’s recent leadership change, with Laurent Freixe stepping in as CEO after Mark Schneider’s eight-year tenure.
Schneider’s leadership saw Nestle’s stock lag behind the broader European market, gaining only 20% compared to a more than 40% rise in the Stoxx 600 Index.
Despite the downgrade, Simon sees limited downside for Nestle’s stock but remains unconvinced of its appeal relative to other companies in the sector.
“We do not find Nestle appealing versus European staples, or food, more specifically, where we prefer Danone and Glanbia,” she said.
As Nestle navigates leadership changes, cost pressures, and a challenging market environment, its ability to deliver growth in the coming years remains a key concern for investors.
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