Current concerns surround Nestlé, leaving many investors in the world's largest food company puzzled about its recent stock performance. Since the start of the year, the company's shares have seen a notable decline of 7%, dipping below the significant threshold of CHF 100. This has raised questions about the reliability of the Swiss behemoth, which has been traditionally perceived as a stable investment, particularly in times of uncertainty, given the perpetual demand for food.
However, this conventional wisdom has recently been challenged by the success of Novo Nordisk's weight loss injections. Novo Nordisk, a Danish pharmaceutical company, claims that their product, which employs the active ingredient semaglutide, effectively reduces body weight by curbing overall appetite and diminishing the preference for high-fat foods. Fearing potential repercussions on the sales of traditional food suppliers, investors have been hesitant to invest in such stocks. Jean-Philippe Bertschy, an analyst at Bank Vontobel, elucidated, "With the exception of Danone, all food companies listed on the stock market are grappling with the ramifications of the weight loss injection craze."
Bertschy argues that the extent of the price decline is disproportionate. He speculates that slimming products are likely to reduce food industry sales by at most 1 to 2 percent. When assessing Nestlé, the market leader, Bertschy remarked in an interview with the F.A.Z., "The impact on Nestlé's share price is significantly overstated, as confectionery accounts for only approximately 7 percent of the group's sales."
In reality, Nestlé boasts a strong presence in the high-margin pet food sector (Purina) and stands as a prominent supplier of coffee (Nespresso) and water products (Perrier). Furthermore, the company is actively expanding its portfolio in health-promoting products, despite recent challenges in the health division. Nevertheless, with a current dividend yield of 3 percent, the share's performance lags behind low-risk government bonds, which has begun to undermine Nestlé's reputation as a bond substitute.
Despite the downturn in Nestlé shares, Vontobel analyst Bertschy remains optimistic, highlighting positive trends in sales volumes, lower raw material costs, and the effects of ongoing share buybacks. He envisions substantial growth potential for Nestlé's shares, as exemplified by his price target of CHF 130 (with the current price hovering around CHF 100).
Nestlé's underperformance has also contributed to the Swiss Market Index's (SMI) sluggish performance. With its substantial market capitalization of CHF 266 billion, the food company carries significant weight in the SMI. Consequently, the SMI has receded by nearly 2 percent since the beginning of the year, in stark contrast to the 9 percent and 10 percent gains seen in the Dax and the Euro Stoxx 50, respectively, over the same period.
Roche Weighs Down SMI with Challenges of Its Own
Another noteworthy factor impacting the SMI's performance is Roche, the pharmaceutical company headquartered in Basel. Roche's non-voting equity securities have declined by 19 percent to 236.50 francs since the start of the year, marking a five-year low. The company is grappling with the loss of products that were in high demand during the pandemic, particularly Covid-19 tests. Additionally, the strength of the Swiss franc has further dampened its sales.
Roche has also faced significant setbacks in its quest to develop new drugs. Both the Alzheimer's drug Gantenerumab and the cancer drug Tiragolumab fell short of achieving the anticipated treatment outcomes in clinical trials. The disappointments continued in late October when the gene therapy Elevidys, intended for the treatment of Duchenne muscular dystrophy (DMD), failed to meet the primary treatment objectives in a late-stage phase III clinical trial, showing only marginal improvement compared to a placebo.
UBS Emerges as Swiss Stock Market Leader
While Nestlé and Roche face headwinds, UBS has emerged as a shining star on the Swiss stock market in the current year. The bank's stock price has surged by nearly 29 percent to 22 francs, reflecting investor optimism surrounding its acquisition of Credit Suisse (CS), a deal that was officially completed in early June. UBS reported a net profit of 29 billion dollars in the second quarter, largely attributable to special effects resulting from the bargain-priced CS acquisition. This profitability provides UBS with a cushion to absorb the significant losses and costs anticipated during the complex and protracted integration of its former rival.
Image by Steve Buissinne