Indigestion

Nestle miss leaves the shares less than appetising

Nestle is struggling to meet internal goals and external expectations. The Swiss food group's shares have underperformed both sector peers and the DJ Stoxx 600 index of European companies over the last 12 months. Poor first-half results have now vindicated investors scepticism.

The company says it might miss one of its cherished performance goals - a multi-year ambition to grow organic sales at between five and six per cent a year. A 2.4 per cent slide in the shares reflected the surprise. Revenue climbed 4.1 per cent in the first half, prompting Nestle to warn that it would be a "stretch" to achieve growth of five per cent for the year as a whole. With slow European economies pinching consumer spending, it is hard to see the group achieving a smart pick-up in the second half.

Nestle says the long-term target remains in place, implying the group is confident it will be back on track in 2014. That sounds like a bet that economic recovery will come in Europe before long.

The sheer size and spread of Nestle may also hamper attempts to drive operational performance when markets aren't naturally delivering strong growth. Nestle's products range from KitKat chocolate bars to Nespresso coffee capsules, bottled waters, pizzas and weight-loss programmes. There's strength in diversity - the overall cost of capital is probably lower than would be the case if Nestle's constituent units stood alone. There are synergies in R&D, sales, and advertising too. But its travails with its Jenny Craig weight-loss business raise questions about management's ability to engineer growth organically.

The market still seems to be giving the company the benefit of the doubt. The stock trades on a less than appetising 18 times forward earnings - a slight premium to the sector and substantially above the DJ Stoxx 600's 12.7, based on Starmine data.

Investors may well ask if Nestle is finding its diverse portfolio of business too broad to manage effectively. UK rival Unilever was able to grow revenue by five per cent in the first half. To sustain a premium rating, Nestle needs to show either that it can deliver growth or find new efficiencies to boost the bottom line. Or management will need to lower expectations permanently.