London, Sept 26 - Swiss-based Nestle looks one of the best-placed of Europe's top food companies looking forward into 2009 as commodity price rises abate and they seek to cope with slowing economies around the world.
The world's biggest food group Nestle, maker of Nescafe coffee and Carnation milk, is gaining from the recent fall in milk and dairy costs while its wide geographic and product spread will help it soften the impact of slowing markets.
Nestle is one of the world's biggest milk buyers and saw prices fall earlier this year to be followed later by declines in coffee, cocoa and grains, which signalled that the worst of the severe input cost pressures it had faced is now passing.
Analysts at brokers Citi said the European food and beverage sector is currently the most expensive in the market due to its traditional defensive quality, but within the sector they say Nestle is relatively the best placed of four big food groups.
"Coupling Nestle's relatively benign input cost position with the inherent defensiveness offered by the breadth of its category and geographic spread, the stock continues to be our favoured large-cap pick to navigate through the bear market," said Citi analyst Jeff Stent.
France's Danone will also gain from milk price falls for its Actimel yoghurt and baby food businesses, while Unilever Plc/NV has only recently seen its key edible oil prices fall and Cadbury Plc could be hurt by its exposure to still relatively high cocoa prices.
"In times of market turmoil, investors will look for safety and security and we see Nestle as the best bet in the Europe food sector," said one UK fund manager with Nestle shares.
Analysts point out that Nestle's and Danone's pattern of exposure to high commodity costs is coming off quicker than Unilever, which is locked into higher edible oil prices for most of 2008 while Cadbury still faces high cocoa prices.
"We see input inflation cycling out by early 2009 after the effect of hedging and forward buying unwinds," said analyst Martin Deboo at Investec Securities.
Nestle shares trade on 14.0 times forecast 2009 earnings reflecting its better outlook than Unilever on 13.7, but still lag Danone's 15.2, boosted by its historic faster growth rates, and Cadbury on 17.3, helped by persistent takeover talk.
Nestle expects commodity and packaging costs to rise by around 7.3 percent or 2.2 billion Swiss francs ($2.02 billion) of its 30 billion francs input cost base in 2008, but it sees this rise slowing to 2.5 to 4.0 percent for 2009, as its key commodities costs led by milk but also including coffee, cocoa and sugar stabilise.
Of the 14 billion francs Nestle spends on agricultural commodities around half is on milk and dairy products to produce some of its top brands such as Nesquik, CoffeeMate, Milo and Haagen Daz ice cream.
France's Danone has guided towards a 390 million euro ($570.6 million) rise in raw materials and packaging this year and will gain, like Nestle, from falling milk price for its yoghurt and baby formula operations, but some worry over its reliance on mature markets.
"We remain nervous on the implications of consumer downtrading in Europe -- 65 percent of sales -- for Danone's volumes .... We suspect that life will remain difficult through 2009," said Citi's Stent.
Cadbury, the world's largest confectionery group until the Mars-Wrigley deal is completed early next month, has guided towards 5 to 6 percent cost inflation in 2008 but could face pressure in 2009 from cocoa prices in particular. Citi's Stent says Cadbury will have the biggest 2009 input cost headwind of the four groups with cocoa prices in sterling terms some 45 percent higher than a year ago, although other analysts say lower sugar, sweetener and crude oil prices should help offset some of the higher cocoa price effect.
Investec's Deboo says he is a seller of Cadbury shares due to overdone takeover speculation, the potential competitive threat from a Mars-Wrigley combination and the execution risk in Cadbury's strategy to improve its profit margins.