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Sales, so the adage goes, are vanity; profits are sanity; and cash is reality. Phooey to that says the market. Nestlé SA's shares dipped on Thursday because of bad news on revenues. Organic sales growth this year will be 5 per cent, rather than the 5-6 per cent previously been signalled. Weak pricing is to blame. That might not seem excessive, but this is not the first time in 2013 that Nestlé's growth has caused jitters. In April there were worries about emerging markets. So it is hardly surprising that the shares have underperformed peers such as Unilever, Danone, Mondelez and Hershey this year. At 18 times earnings they are at the cheaper end of the sector range.
But if the company can turn in a decent performance on profits and cash flow, it should be easy to look past the revenue disappointment. And there was better news as far as profits go. Nestlé's operating margin improved by 20 basis points to 15 per cent as lower raw material prices more than offset rising marketing spend. The result was a 6 per cent increase in operating profits, which is not too shabby given the dire economic environment in Europe.
Cash flow was less encouraging. At 5 billion Swiss francs ($5.6-billion), operating cash flow was 5 per cent below last year. Once again, Nestlé failed to convert all of its first half operating profit into cash. But a jump in working capital meant that less profit turned into cash in 2013 than it did in 2012. Working capital growth is partly a consequence of volume growth, but there is scope for improvement on the cash front.
Still, with the focus so much on Nestlé's revenue performance there is a danger that management puts everything into not disappointing again. The temptation to sacrifice pricing (and hence margins) just to hit that 5 per cent organic sales growth target must be strong. But sometimes it is worth remembering that the old adages are still the best.