Nestle SA (NESN), the world’s largest food company, may say tomorrow that the Swiss franc’s strength reduced first-quarter revenue by the most in more than eight years, threatening a decline in annual earnings.
Sales from continuing businesses at the Vevey, Switzerland- based maker of KitKat bars probably fell 1.7 percent to 20.17 billion francs ($22 billion), according to the average of 10 analyst estimates compiled by Bloomberg. Gains by the franc against the dollar and euro may have cut sales by 9 percentage points, the most in any first quarter since 2003.
About 98 percent of Nestle sales are derived from outside Switzerland, meaning that the strength of the country’s currency may more than wipe out growth in sales, Jon Cox, an analyst at Kepler Capital Markets, said. Citigroup Inc. analyst Sara Welford last week cut her estimates of Nestle’s earnings per share for the next five years by about 8 percent to 10 percent, citing the franc’s appreciation.
“I’m expecting a really high negative forex effect, and like always, it will have been underestimated,” said Patrik Schwendimann, an analyst at Zuercher Kantonalbank who rates Nestle stock “underperform.” Schwendimann estimates a 1 percent decline in full-year “underlying” earnings per share, which would be the first drop in at least six years. That may limit dividend growth in 2012 to 5 percent, he said.
Excluding currency shifts, acquisitions and divestments, Nestle’s first-quarter sales probably rose 5.9 percent, according to the average of 17 analysts’ estimates. The volume of goods sold likely increased 3.7 percent, the survey showed.
The franc was the best-performing major currency in the past year, benefiting from Switzerland’s role as a stable, neutral financial center and as an exporter of products from watches to machine tools. The dollar weakened 15 percent against the Swiss currency, while the euro dropped 9.3 percent.
Swiss National Bank President Philipp Hildebrand said the currency’s rise poses “considerable risks” to the economy as exports risk becoming less competitive.
“It’s unfortunate that they’ve got a big Swiss franc headwind while many of their peers who report in euros have a nice tailwind,” said Warren Ackerman, an analyst at Evolution Securities with a “neutral” rating on Nestle. The company’s historical sales growth would have been higher if Nestle reported in dollars, he said. “It’s mainly translation rather than transactional exposure.”
The franc’s strength has a limited effect on Nestle’s margins because expenses are often in local currencies, Claudia Lenz, an analyst at Bank Vontobel, said by phone. Nestle has more than 440 factories in more than 83 countries. Nespresso coffee capsules, which are all made in Switzerland for export to the rest of the world, are an exception, she said.
The maker of Gerber baby food and PowerBar supplements for athletes said March 22 it expects long-term average annual sales growth of 5 percent to 6 percent, excluding acquisitions, divestments and currency fluctuations. The company also set a goal to improve its so-called trading operating profit margin, based on constant currencies, each year.
Nestle may also announce tomorrow that it plans to buy back an additional 10 billion francs of shares, having received $28.3 billion for its majority stake in eyecare company Alcon Inc. last year, Vontobel’s Lenz said.
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