Morgan Stanley analyst Sarah Simon reiterated a Sell rating on Nestlé SA today and set a price target of CHF72.00.
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Sarah Simon’s rating is based on several financial metrics and strategic considerations. Despite Nestlé’s better-than-expected Q3 results, the company’s current valuation appears unjustified when compared to its peers in the Staples sector. Nestlé is trading at a premium, particularly in terms of free cash flow (FCF) yield, which is significantly higher than both the sector average and its closest competitor, Danone. This premium is difficult to justify given that Nestlé still needs to make substantial progress towards its targets and is operating with elevated leverage.
Additionally, while there is talk of portfolio reviews and potential asset disposals, the market may be overestimating the impact of such actions. Selling assets could lead to stranded costs, and any reduction in interest expenses may not compensate for the loss in FCF. Furthermore, Nestlé’s weak operating cash generation poses a challenge, and selling low-growth assets may not resolve the FCF versus dividend shortfall. Even selling its stake in L’Oreal would have minimal impact on FCF, though it would improve leverage. These factors contribute to the belief that portfolio adjustments will proceed more slowly than anticipated, supporting the Sell rating and a price target of CHF 72.
According to TipRanks, Simon is an analyst with an average return of -1.3% and a 49.49% success rate.