Nestle SA was rated “reduce” by Nomura Holdings Inc. and “underperform” by Bank of America Merrill Lynch, its first sell recommendations since April, because of concern that earnings growth won’t meet estimates.
David Hayes, a London-based Nomura analyst, said Nestle may miss sales and profitability targets this year. Robert Waldschmidt, an analyst in London at Bank of America Merrill Lynch, said the Swiss franc’s gains on currency markets and higher commodity costs will cut into Nestle’s profit growth. Both banks previously recommended buying Nestle stock.
“We see little scope for earnings upgrades in the next 12 months,” Waldschmidt wrote today in a report.
Nestle fell the most in eight months in Zurich trading after each analyst cited the company’s acquisition policy as a reason for the downgrades. Hayes said he’s “disappointed” Nestle hasn’t used a $28.3 billion payment that the food company got from selling its Alcon Inc. stake for major purchases. Waldschmidt said investors are concerned that Vevey, Switzerland-based Nestle may make big deals, stunting returns.
“If there is no deal to come, the opportunity for Nestle to take the business case to a new level is missed,” Hayes said in his report.
Nestle fell as much as 1.55 francs, or 2.9 percent, to 52.10 francs, the biggest intraday drop since May 7, and was down 2.4 percent as of 3:21 p.m. That pared the stock’s gain in the past 12 months to 7.3 percent, valuing the manufacturer at 181.6 billion francs ($188 billion).
The company hasn’t had a “sell” rating among analysts who share their recommendations with Bloomberg since Richard Withagen, an Amsterdam-based analyst at SNS Securities NV, raised Nestle to “hold” on April 22.
Sales growth is becoming more challenging for Nestle in emerging markets and competition is increasing in pet food, the Nomura analyst wrote. Nestle will struggle to increase its operating margins on higher commodity prices, Hayes said.
Nestle’s 2011 sales excluding acquisitions, divestments and currency shifts will probably increase 4.8 percent, less than the company’s target of 5 percent to 6 percent growth, Nomura estimated. Hayes cut his share-price estimate on Nestle 23 percent to 49 francs.
Bank of America Merrill Lynch has a price estimate for Nestle of 58 francs.