(Bloomberg) -- Nestle SA received a rare negative rating as Morgan Stanley turned bearish on the consumer-goods giant, adding to a recent turn in the tide of analyst opinion.
Shares in the maker of Kit Kat fell as much as 1.2% in Zurich to the lowest since February 2019 after analyst Sarah Simon cut her recommendation to underweight from equal-weight and reduced her price target to the least among analysts tracked by Bloomberg.
The stock now has 13 buy-equivalent ratings, 13 holds and two sells, bringing the proportion of buy calls and the average price target to the lowest in more than five years, according to data compiled by Bloomberg.
Nestle shares are down 10% this year through Friday’s close as the snack maker struggles to win back shoppers. The company last month appointed Laurent Freixe as chief executive officer, replacing Mark Schneider, who had been in the role for almost eight years. Schneider, once popular among investors, had seen his star fade as growth concerns led to his abrupt exit.
During Schneider’s tenure, Nestle shares had lagged the European benchmark, gaining 20% compared with a rally of more than 40% in the Stoxx 600 Index. The stock had outperformed during his predecessor Paul Bulcke’s reign.
Simon said in a note that Nestle may deserve a premium valuation over the medium term, but noted that the stock was already pricing in a turnaround in the nearer term. She sees potential for high-single-digit or even low-double-digit cuts to consensus earnings-per-share expectations for the 2025 and 2026 fiscal years.
“Our estimates suggest that FY25 will be a transition year,” Simon said. “Put simply, we believe that 2025 P/E based valuation already prices in Nestle’s traditional premium. Yet we believe that in FY25 it will deliver lower organic sales growth than the peer group.”
Simon noted Nestle’s margin growth since 2017 had come from cutting advertising and fixed costs. If the company were to step up advertising and promotional spend, she estimated it would create a headwind of 170 basis points to the margin by 2026. Given commodity pressures in 2025, generating gross margin improvement to offset rising costs “will be challenging,” she said.
“While we do not see significant absolute downside at present, we do not find Nestle appealing versus European Staples, or Food, more specifically, where we prefer Danone and Glanbia,” Simon said.
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