Nestle (NSRGY): Global Growth, Hidden Values & First World Stability
A Global Food Giant that trades on the Pink Sheets
All financial figures are quoted in US dollars,. The conversion rate from Swiss Francs to US dollars at the rate of $.9921 was booked as of 03/25/08. All forecasts are solely that of the author, and may differ from published analyst estimates. The author owns shares of Nestle at the time of publication.
Blue chip investors seeking to capitalize on global growth trends should consider Nestle as a core holding within a diversified account. Over the next two years I forecast a rising stock price, driven by positive earnings surprises. A spin-off of a very valuable subsidiary is possible.
On 03/25/2008, Nestle had a market cap of $189.7 billion, and a trailing enterprise value of $243.1 billion.
Nestle is the world's largest food and beverage company
Key divisions include freeze dried coffee company, ice tea and bottled water. Nestle also produces infant formula, baby foods, dairy products, confectionary products, ice cream and pet foods (Purina). 70% of total revenue is derived from "billion dollar" brands.
2007 revenue was $106.7 billion. 2007 EBITDA was $18.1 billion, for a margin of 17%. Net profits for 2007 were $10.56 billion.
Business is truly global
Nestle has divisions in 103 countries. Europe generated more than 38% of total sales, and produced almost double digit revenue growth in 2007. The US and Canada (30% of total sales) showed revenue gains of 6.7% in 2007.
Russia, Australia and Brazil each produced 20%+ revenue growth in 2007, and accounted for more than 9% of total sales.
Top and bottom lines have grown organically and via acquisition. In July 2007, the Novartis medical nutrition business was purchased for $2.5 billion. In late 2007, Nestle added Gerber, the maker of baby foods, for $5.5 billion.
In 2007, Nestle demonstrated why its business is the envy of the industry.
Nestle noted that raw materials, packaging and energy costs rose by more than 23% during 2007. Many consumer products companies, particularly in the US, were unable to fully pass on costs to customers.
Management at Nestle was prescient. They correctly forecast commodity inflation for a few years out, raised prices quickly and hedged many inputs. The strength of the Euro has also offset a great deal of cost inflation.
2008 looks to be equally good
Nestle intends to increase sales by at least roughly 7% for 2008 and improve margins further.
Several European countries have reduced corporate taxes for 2008, some by whopping amounts. This should aid Nestl's net result.
All else being equal, earnings have the potential to increase by up to 17% for 2008.
In comparison to global peers, Nestle seems inexpensive
Pepsi sells for about 13.9X my 2008 estimated year end EV/EBITDA. DANONE sells for about 15.4X my estimated 2008 year end EV/EBITDA and has a revenue mix geographically similar to Nestle. Nestle shares sell just 11.9X my estimated 2008 year end EV/EBITDA.
Nestle has a strategic holding which may be spun off in the future
The firm owns 230.25 million shares of Alcon (ACL) with a current market value of $33.2 billion. Alcon is accounted for as a subsidiary, and represented 4.5% of 2007 revenues and 8% of EBITDA. Despite the modest contribution to Nestl's overall results, ACL represents about 17.5% of Nestl's current share price. It is logical to suggest that Nestle may divest Alcon at some point.
Nestle also owns 176.4 million shares of L'Oreal, worth $22.7 billion. L'Oreal sits on the balance sheet at a $7.9 billion value. The two firms have joint ventures that produce corticosteroids and cosmetic nutritional supplement.
What could fair value for Nestle be in 24 months?
My assumption is that EBITDA could touch $21.4 billion in 2009. Total liabilities-short term cash may fall to -$39 billion.
At 13X EV/EBITDA, a share price of $155 for Nestle is realistic. Add in the $3.03 per annum of current dividends, and an annual return of 15.6% through 2009 is possible.
Taking into account Nestl's growth prospects, I feel the firm deserves a valuation at least in line with Pepsi. Should my thesis prove out, a 24 month forecast share price of $170 is possible. With dividends, a total return of 21.6% per annum through 2009 is achievable.
A spin-off of Alcon by year end 2009, could add a further $18.5 per share to my forecast.
Nestle is underfollowed by Wall Street, underowned by global institutions & underheld by US retail investors
Oddly enough, for such a major company, Yahoo reports just 3 US brokerage firms which issue coverage. Therefore, it is certainly not widely held by individual investors in the US. S&P doesn't follow it either.
Institutional ownership accounts for less than 27% of the outstanding issue. 44% of these institutions are deemed to be "low turnover" funds.
The largest mutual fund position is held by Oakmark Equity and Income fund (OAKBX). This is a 5 star rated fund in the moderate allocation category. The fund has actually pulled a net positive return out of the market YTD and is gathering assets thus far in 2008.
The Vanguard Wellington fund (VWELX) is the second largest mutual fund holder of NSRGY in the US. They are also rated 5 stars in the US in the moderate allocation category. Once again, this fund looks to be gathering net new assets so far in 2008.
Nestle is my #1 pick in large cap food and beverage companies for 2008
Food and input inflation proved to be a shock for several consumer products companies in 2007. More than a few peers may continue to suffer negative consequences in 2008.
Furthermore, many non diversified North America peers struggle to avoid becoming little more than "off balance sheet" subsidiaries of Wal-Mart; whereby Wal-Mart demands and obtains lower prices from manufacturers, at the expense of operating margins.
Nestle, with a focus upon Europe and emerging markets, seems little impacted by the margin pressures imposed by Wal-Mart. As a shareholder, I'm pleased for that.
A 24 month return forecast of 15.6%-21.6% per annum, might seem unappealing to those yearning for headier times. However, Nestle looks to be one of the few firms capable of beating forecasts, in a tough operating environment. Should Alcon be spun off, total returns of 23.1%-29.1% per annum through 2009, are possible.
NSRGY is a position in my RMG#1 portfolio. To see my RMG#1 portfolio and performance, click here