Nestle may miss sales goals after Alcon move

Nestle SA, the food company that plans to divest its stake in eye-care company Alcon Inc., may miss operating margin and sales targets next year after selling its most profitable business, analysts said.

Locally, Nestle has operations in DeKalb, Woodridge, Buffalo Grove and Naperville.

Nestle's 2010 margin will shrink to 13.2 percent from 14.5 percent this year, according to the median of five analysts' estimates, missing the company's goal for an increase every year. So-called organic revenue will advance 4.2 percent next year, the analysts forecast, missing the 5 percent to 6 percent growth target.

"Alcon has a huge impact on the margin because it's more profitable than Nestle's food and beverage businesses," said Barbara Ambrus, an analyst at Landesbank Baden-Wuerttemberg. "Even if they buy something to add on to their food and beverage business, it'll never have such a high margin."

A miss would be the second straight for Chief Executive Officer Paul Bulcke since taking the helm in 2008, when he pledged to meet the targets for the coming ten years. Alcon products like Opti-Free Replenish Multi-Purpose Disinfecting Solution sell for about $10 at some U.S. stores and helped the unit post an operating margin of 35 percent last year, more than double Nestle's.

Buybacks

Nestle will publish figures for 2009 and 2008 including and excluding Alcon to show the performance of the underlying business, said Roddy Child-Villiers, head of investor relations for Nestle. Analysts should therefore compare the margins of Nestle excluding Alcon, he said, adding that "a sale of Alcon cannot therefore account for a margin miss."

Each percentage point off the operating margin and sales growth is about 1 billion Swiss francs ($970 million), according to Jon Cox, an analyst at Kepler Capital Markets.

The maker of KitKat bars stands to gain as much as $28.2 billion from the sale and may spend as much as 30 billion Swiss francs ($29.1 billion) on buybacks over the next three years, said Cox. Major purchases such as Cadbury Plc or Mead Johnson Nutrition Co. would raise antitrust issues as Nestle has become too big in many categories such as chocolate and baby nutrition, Richard Withagen of SNS Securities said.

Losing Alcon will strip out as much as 0.4 percentage point of Nestle's total annual sales growth and 1.4 percentage points off its operation margin, according to Marco Gulpers, an analyst at ING Wholesale Banking in Amsterdam.

'Strong Likelihood'

Excluding Alcon from both 2009 and 2010 results, Nestle will probably post a higher margin, Ambrus said. While Nestle's sales and margin targets will become more difficult to reach without Alcon, the company shouldn't abandon them, Withagen said. Nestle met or exceeded the goals for the four years through 2008 and signaled on Aug. 12 that they would miss the sales goal in 2009.

As of Jan. 1, Nestle has the right to sell a 52 percent stake in the business to Novartis AG for as much as $181 a share. The first day Nestle can exercise the option is Jan. 4, the first working day of the month, Child-Villiers said.

Nestle said Oct. 22 there's a "strong likelihood" it will exercise the option, and that there's no reason to wait if it can get the maximum price in early January, which is linked to Alcon trading at $150.20. Alcon closed at $166 a share yesterday.

Nestle has been gradually disposing its Alcon stake since 2002 to focus on food, nutrition and beverages. The move also helps the company be more fairly valued by the market, though the current share price already more than accounts for that effect, Withagen said.

The stock trades at 17.1 times estimated 2009 earnings, compared with 13.8 for Kraft Foods Inc. and 16.6 for Danone SA.

Operating Profit

The eye-care unit last year generated operating profit of $2.2 billion, the equivalent of a sixth of the Swiss food company's total. Nestle doesn't get all the profit as about 48 percent of the stock is owned by the public and Novartis.

"The Ebit margin will have a one-time drop, but they don't have to adjust the model for the simple fact that they're selling Alcon," said Withagen, who cut Nestle to "reduce" Oct. 23 because he thinks investors have given Nestle too much of a premium for getting rid of non-strategic investments.

Shares of Nestle have gained 21 percent this year, outpacing the 2.4 percent advance in shares of Kraft, Nestle's largest rival.

Pharmacy Roots

The Swiss food company will have multiplied the value of its original investment in Alcon about 143 times in about three decades if it sells the final stake. Alcon's roots trace back to a pharmacy Robert Alexander and William Conner opened in Fort Worth, Texas in 1945. The name is a combination of the first parts of each of their last names. The Nescafe maker spent $280 million to buy Alcon in 1977 and will have reaped about $40 billion total from the investment.

Nestle sold a stake in a 2002 initial public offering for $2.2 billion and then divested a 25 percent stake to Novartis in July 2008 for $10.4 billion.

"Nestle became confident enough in the growth of its non- pharma operating margins to free itself" from Alcon, said Tom Russo, a partner at Lancaster, Pennsylvania-based Gardner Russo & Gardner who holds Nestle as one of his largest investments. The profits reaped are "patience well-rewarded."