Nestle share rating cut at Credit Suisse for first time Since ’05
GENEVA: Nestle SA, the world's largest food company, had its share rating cut at Credit Suisse for the first time in almost six years after the stock's outperformance versus peers caused the brokerage to reassess its opinion.
The recommendation was lowered to "neutral" from "outperform," where it had been since January 2005. The shares trade at 17 times profit, a premium to peers, compared with a price-earnings ratio of 12 in 2005, when it was at a discount to rivals, Credit Suisse analyst Alex Molloy wrote in a report.
Nestle has less potential to improve profitability after increasing its food and beverage operating margin to 13.5 percent this year, excluding acquisitions, from 11.8 percent in 2005, Molloy wrote.
Credit Suisse estimates that 40 percent of the gain in Nestle shares since the March 2002 initial public offering of its Alcon Inc. unit came from the eyecare company. Nestle sold its remaining majority stake in Alcon in August.
"Nestle's business today is in terrific shape, and there is more to come from it," Molloy wrote. "It may be time to draw breath" as the stock trades at a 15 percent premium to U.S. and European peers, he said.
Nestle fell 80 centimes, or 1.4 percent, to 54.95 Swiss francs at 9:42 a.m. in Zurich trading. The stock touched a record 56.90 francs in intraday trading on Nov. 26 and has risen 16 percent in the past year, giving a market value of 191 billion Swiss francs, more than any other European company.
Nestle shares have gained about 43 percent in the past five years, compared with a 1.9 percent gain in Kraft Foods Inc., the world's second-largest food company.
Nestle, which got $28.3 billion for its majority stake in Alcon, will probably return most of the cash it has accumulated through buybacks and dividends over the coming three years, Molloy said in the report.
The KitKat maker may spend 7.5 billion francs a year on buybacks and 2 billion francs to 3 bill i o n francs annually on acquisitions, which would leave Nestle with net debt of about 19.5 billion francs at the end of 2013, he said.
Nestle will probably maintain its near 30 percent stake in L'Oreal SA as an acquisition of the cosmetics maker wouldn't make "financial or commercial sense," Molloy wrote.
Moreover, U.K. consumer confidence unexpectedly dropped to a four-month low in November as looming public-spending cuts dented Britons' outlook for 2011, a report by GfK NOP Ltd. showed.
The index of sentiment declined 2 points to minus 21, the research group said in an emailed statement in London today. Economists predicted no change from minus 19 in October, according to the median of 13 forecasts in a Bloomberg News survey. A measure of sentiment on the economy for the coming year fell 2 points to minus 22.
Britain faces the biggest fiscal squeeze since World War II to tame the record budget deficit, prompting the loss of 330,000 public-sector jobs by April 2015. The Treasury's fiscal watchdog yesterday cut its economic growth forecast for 2011 and said the U.K. faces a "sluggish" recovery.
The report "is clearly not good news," Nick Moon, managing director of GfK NOP Social Research, said in the statement. "What is more worrying in this month's figures is that the worst-performing elements of the index are those that look to the future."
A gauge of Britons' views on their personal finances for the coming 12 months fell 5 points to minus 7, and a measure covering the last year held at minus 13. An assessment of the country's general economic situation in the last 12 months fell 3 points to minus 46.
A gauge on the climate for making major purchases fell 2 points to minus 17. GfK NOP conducted the survey of 1,999 people from Nov. 5 to Nov. 14.
The Office for Budget Responsibility cut its 2011 growth forecast for the U.K. to 2.1 percent from 2.3 percent. The government watchdog still reduced its forecast for public-sector job losses from a June estimate of 490,000 and raised its projection for growth this year to 1.8 percent from 1.2 percent.
The outlook for the economy has divided Bank of England policy makers, who decided this month to leave their bond purchase plan at 200 billion pounds ($311 billion) and the key interest rate at a record low of 0.5 percent.
One member, Andrew Sentance, has been calling for higher interest rates since June to stem inflation, while Adam Posen maintained a push for a second month to boost bond purchases to stoke growth. -Bloomberg