Nestle's Anticipated Profits Fall Short of Bond Yields
Nestlé, the global leader in the food and beverage sector, is currently facing challenges with declining revenue and pressured margins. However, a bullish case for investing in the company persists, based on its strong brand and market leadership, positive technical indicators (especially for Nestlé India), signs of recovery, and a valuation that reflects growth expectations.
Despite the recent disappointing half-year results, Nestlé commands a dominant position in the global market with a wide portfolio of trusted brands. This entrenched market position underpins long-term growth potential despite short-term setbacks.
In the first half of 2025, Nestlé's sales were CHF 44.2 billion, down 1.8% year-over-year. The company's gross margin contracted 60 bps, and the underlying trading operating margin dropped 90 bps. Nestlé's margins declined approximately 100 bps, and the earnings decreased by 11%.
However, Nestlé's Confectionery and Powdered & Liquid Beverages categories were the main drivers of organic growth. Interestingly, Nestlé's organic growth is solely driven by pricing, suggesting the company's ability to maintain its profitability in challenging market conditions.
The bullish arguments for investing in Nestlé (including its Indian subsidiary, Nestlé India) focus on several key points. Firstly, the company's strong brand and market leadership provide resilience and pricing power even during challenging economic cycles. This entrenched market position underpins long-term growth potential despite short-term setbacks.
Secondly, although mixed, some daily moving averages and the On-Balance Volume (OBV) indicator for Nestlé India suggest a cautiously bullish near-term outlook amid sideways or mildly bearish momentum on longer-term charts. This implies some investor confidence and buying interest at current levels.
Thirdly, signs of urban market recovery have been noted recently, despite the Q1FY26 results missing expectations. This recovery could drive sales growth in coming quarters if consumer spending strengthens.
Fourthly, the Price to Earnings ratio is currently high (~70.55x), reflecting high growth expectations and pricing power in premium food categories. Around 23.7% of analysts still recommend a Buy, while nearly half prefer Hold, showing cautious optimism about longer-term prospects despite recent challenges.
Lastly, historically, Nestlé India has delivered positive returns in July in 10 of the last 16 years, suggesting some seasonal resilience.
Taken together, these arguments support a bullish stance for investors with a medium- to long-term horizon betting on Nestlé’s brand strength, recovery prospects, and the possibility that recent setbacks are temporary rather than indicative of structural decline. However, this thesis is nuanced by mixed technicals and some analyst caution, implying that investors should remain vigilant about margin pressures and revenue trends.
Despite these challenges, Nestlé has a plan to focus on winning SKUs, but no significant divestitures have been made since the new CEO appointment. The company's net debt surpassed CHF 60 billion, primarily due to buybacks.
In conclusion, while Nestlé is currently facing financial pressures, the bullish case hinges on its solid market franchise, signs of demand rebound (especially in India), selective positive technical signals, and a valuation that implies growth expectations despite short-term financial pressures. However, investors should remain cautious and monitor margin pressures and revenue trends closely. The article suggests a 'Hold' rating for Nestlé and encourages investors to allocate their money elsewhere.
[1] Source [2] Source [3] Source [4] Source
- Given the strong brand and market leadership of Nestlé, alongside the signs of recovery, particularly in its Indian subsidiary, and the positive technical indicators, financial investment in the company remains a compelling option for investors with a medium- to long-term horizon.
- Despite the current financial pressures faced by Nestlé and the mixed technicals, a bullish stance for investors is supported by the company's growth potential, the possibility of seasonal resilience, and the high Price to Earnings ratio reflecting growth expectations, suggesting that some investors maintain a 'Buy' recommendation despite recent challenges. However, it is crucial for investors to remain diligent and monitor margin pressures and revenue trends closely.
