INSIGHTS

WEEKLY COMPANY INSIGHT: NESTLE

Peter Ball, 22 August 2019

NESN220819 

Description

Nestlé 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, it is much more than just a chocolate company. Major brands include Nesquik, Aero, Nescafé, Milo, KitKat, Maggi and Purina. In addition, Nestlé owns 23% of leading cosmetic manufacturer L’Oréal.

Quality defensive name

Nestlé remains an attractive proposition over the long-term. The company has strong operating margins, impressive returns on investment capital, strong brand positions in a number of segments, an attractive dividend yield, and broad exposure both by products and by geography. Additionally, ongoing cost cutting initiatives, the divesture of lower growth businesses, and a high quality US exposure all bode well for the stock. The company should continue to deliver best amongst-peers performance.

Portfolio refresh

The new CEO, Mark Schneider, is taking a very proactive approach to cutting underperforming businesses in order to focus on the company’s leading categories and improving its growth outlook. Nestlé is in the process of updating 10% of its businesses through a combination of acquisitions and divestments. Over the past 18 months, it 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. In our view, these are all positive changes for the company and we believe that management’s target of organic growth of 5% by 2020 is starting to look a lot more attainable.

Investor expectations are low creating the potential for upside surprises

Key sources of upside potential for Nestlé 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. We view shares as having significant optionality to a positive surprise in any of the above-mentioned factors.

Outlook

One of the biggest attractions of the stock is its consistency. Predictable and consistent dividend growth and relative earnings certainty makes the company an attractive longterm investment. The company has a long history of outperforming in volatile markets; this tends to suggest that investors see Nestlé as a safe, defensive stock. Nestlé 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 Nestlé remains very much unchanged. This is a core holding and we recommend investors look to increase exposures on any weakness.

Risks

  1. economic downturn
  2. product recalls
  3. increased competition
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