WEEKLY STOCK COMMENT: NESTLÉ
Roy Davidson, 22 November 2018
Nestlé (NESN) is one of the world’s leading nutrition, health and wellness companies. With instant coffee, baby formula and bottled water just some of its products, NESN is much more than just a chocolate company. Major brands include Nesquik, Aero, Nescafé, Milo, KitKat, Maggi and Purina. In addition, NESN owns 23% of leading cosmetic manufacturer L’Oréal.
NESN is one of the world’s leading nutrition, health and wellness companies. With instant coffee, baby formula and bottled water just some of its products, NESN is much more than just a chocolate company. Major brands include Nesquik, Aero, Nescafé, Milo, KitKat, Maggi and Purina. In addition, NESN owns 23% of leading cosmetic manufacturer L’Oréal.
NESN’s new CEO, Mark Schneider, is taking a very proactive approach to cutting underperforming businesses in order to focus on its leading categories and improving its growth outlook. The company is in the process of updating 10% of the company's businesses through a combination of acquisitions and divestments. Over the past 18 months, NESN acquired nutritional health specialist, Atrium for US$2.3bn, coffee roaster, Blue Bottle Coffee for US$425m, sold its US confectionery business to Ferrero for US$2.8bn and acquired the perpetual rights to market Starbucks consumer and foodservice products for US$7.15bn. Management announced that they are exploring strategic options, including a potential sale, for its Gerber Life Insurance business. Assuming this business is sold, and including the acquisition of Starbucks’ consumer business, then management will have completed around 5% of their 10% transformation target. In our view, these are all positive changes for NESN and we believe that management’s target of organic growth of 5% by 2020 is starting to look a lot more attainable.
Key sources of upside potential for NESN are the return of inflation, cost cutting, and margin expansion as investments and brand repositioning activities improve profitability. It would also be very helpful if emerging market currencies were able to find some stability to reduce the foreign exchange drag on sales. While we do not view any of these catalysts as imminent, we also note that the market is not pricing in any of these outcomes either. As such we view shares as having significant optionality to a positive surprise in any of the above mentioned factors.
One of the biggest attractions of the stock is its consistency. Predictable and consistent dividend growth and relative earnings certainty makes NESN an attractive long-term investment. The company has a long history of outperforming in volatile markets; this tends to suggest that investors see NESN as a safe, defensive stock. NESN also offers a very attractive dividend yield for a global stock. Despite some shorter-term concerns around slowing growth rates and currency headwinds in emerging markets, the long-term story for NESN remains very much unchanged.
Risks to NESN include:
- economic downturn
- product recalls
- increased competition