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Nestle October 18th,2019

Nestle NESN.VX is the worlds biggest food company with revenues of 91 bn CHF (2018) covering plenty of fields of food products spread very even over the whole globe. Nestle is a very profitable company with a net profit 10.1 bn CHF 2018. 

A motivation to buy Nestle is the slow but steady growing business. It is a share for retirement. 

This is not a recommendation or proposal to do anything. It is my private personal opinion. I`m not independing as I own a position of Nestle shares and I was working for Nestle many years till more than a decade ago. The information below are best guesses it is not guaranteed. 

Chances & Risks

Nestle is compared to similar companies with a profit/share of perhaps 4.3 CHF equivalent to a PE of 24 (104CHF) expensive. The dividend yield of 2.4% is above the yield of CHF bonds below that of other FMCG companies.. 

In H1/2019 an organic growth of 3.7% was achieved. 3% real internal growth and 0.7% pricing to 45.5 bn CHF. The guidance is set to 3.5% organic growth and a margin of 17.5%. It seems as Nestle has pricing power in developing countries but not in the old industrial countries in Western Europe and North America. This is acc. to my own observation during my career. It is nearly impossible to get a price increase with the strong established trade partners in Western Europe but it is nearly no problem with the scattered trade in developing countries.   

The debt increased from 21.4 bn CHF to 30.3bn CHF on 31.12.2018. On the other hand 6.8 bn CHF were spent on the buyback of shares, another 5.2 bn CHF came from M&A as the buying of the Starbucks retail business. It is planned to give the shareholders 2020 - 2022 20bn CHF in returns(7). It is a company that spends a lot on dividends and share buybacks that increases dept. It is a two-sided sword!  

A cash return of 13.9 bn CHF to the shareholders compared to a free cash flow of 10.8 bn CHF is by no means sustainable. Brands are expensive to be build up or to buy (see Starbucks) but for far less to  maintain. If brands are not maintained well brands are loosing their value. From the business logic it would be preferable for Nestle to cut the share holder return by half and to invest more in the brands. I assume that the Nestle management is not strong enough to resist activist shareholders. 

Nestle is a company to stay in for retirement. The strong brands and cash flow, a regional well balanced business, the FMCG as such make it one of the most stable company of the world. I assume that Nestle will grow organic in the next couple of years with 1 - 3% in CHF.

Nestle communicates more honest and decisions are driven more by logic than that of other big FMCG companies.  

The main risk of Nestle is its tendency to beaucracy, complex structures and overhead. Nestle acts slower compared to smaller sized, leaner European companies as Müller Milch, Hipp or Krueger. Nestle gave up plenty of brands and products as these brands were passed by smaller more agile competitors. In developing countries Nestle profits from its superior know how, the transfer of products and brands in these markets.

The big swiss R&D centers are successful in optimizing taxes but usually seem to act somewhere far away from reality. Successful new products were developed by coincidence only if at all. As a result Nestle has to buy in successful brands as Starbucks coffee to renew the portfoilio. Successful brands are very expensive. Some 14 years ago Nestle implemented an ERP program that pressed the whole company in very rigid unflexible structures.

Some activist shareholders are pressing the company to increase profitability selling its Loreal(1) share. This initiative is not really helpful. It may press the management to look for short term profitability but does not help in the long run. The poeple keep their food preferences from their youth during lifetime. Thus it makes sense to develop brands for a long term success.  

All in all Nestle needs to find structures that allows to improve agility and flexibility and get rid of the big overhead. During the Maucher era in the 90ies Nestle was less centralized. The countries and divisions had plenty of room for decision. The group was directed by an informal Swiss expat network.

Some observations

Nestle bought a share of the Independent Vetcare Group that operates 1100 animal clinics in Europe and the Middle East. It makes sense as the doctors have a high reputation and if they recommend Nestle Pet food it might increase the revenues of this division significantly(5)

The business of Nestle is very well balanced over the whole planet. It covers many food brands. That gives Nestle the highest stability of nearly all companies of the world. 

Nestle was once very much concentrated on Europa. Actually it looks like the Americas...Nestle is strong in South America... becomes more and more focused on the Americas. 

 

Source: Nestle (4) Full Year 2018  

Some Data

number of shares outstanding: 2954 millions July 19

Dividends: Stable, increasing. Dividend estimate 2.45 CHF -> a 2.4% yield. 

Underlying Net Profit 1 HY 2019 :  6 298 mio. CHF

Free Cash Flow 1 HY 2019: 4.1 bn CHF

Share buyback: 20 bn CHF over 3 years to be completed end of 2019

Data from Market Screener (2)

 

Major Shareholders Aktien %
Nestlé SA 93 053 584 3,04%
The Vanguard Group, Inc. 82 039 186 2,68%
Norges Bank Investment Management 74 743 612 2,44%
UBS AG (Investment Management) 49 377 646 1,61%
Capital Research & Management Co. (World Investors) 46 106 955 1,51%
Capital Research & Management Co. (Global Investors) 42 075 931 1,37%
BlackRock Fund Advisors 41 668 324 1,36%
Third Point LLC 40 000 000 1,31%
Massachusetts Financial Services Co. 30 989 560 1,01%
Zürcher Kantonalbank (Investment Management) 28 706 688 0,94%

The most important holding of Nestle is the 23% stake (129881021 shares) at Loreal 

Consumer Good Companies

In boom times consumer good companies increase their revenues as more poeple buy branded products but earn less when raw materials, labour and nearly all costs are rising. In recessions it is the other way. Revenues are decreasing slightly but profits are increasing significantly. In the business figures these effects are straightened. For ex. when profits are not satisfying depreciations are done at a minimum. When profits are rising manager remember plants, molds..and other stuff to write it off. 

Some references

(8) 2019 October 18 https://www.nestle.com/sites/default/files/2019-10/pr-2019-nine-month-sales-press-release-en.pdf

(7) 2019 October 18 https://www.handelszeitung.ch/unternehmen/nestle-auf-wachstumskurs-20-milliarden-fur-aktionare?utm_source=Handelszeitung+Newsletter&utm_campaign=1cb5cfbd21-LUNCH_TOPICS_2019_10_17&utm_medium=email&utm_term=0_c1505081ea-1cb5cfbd21-92780129

(6) 2019 April 18 https://www.nestle.com/asset-library/documents/library/events/2018-full-year-results/press-release-de.pdf

(5) 2019 April 09 ttps://www.handelszeitung.ch/unternehmen/nestle-kooperiert-mit-britischer-tierklinik-gruppe?utm_source=Handelszeitung+Newsletter&utm_campaign=95587210e3-LUNCH_TOPICS_2018_12_03_COPY_01&utm_medium=email&utm_term=0_c1505081ea-95587210e3-92780129

(4) 2019 Feb 19 https://www.nestle.com/asset-library/Documents/Library/Presentations/Sales_and_Results/2018-full-year-results-investor-presentation.pdf

(3) 2019 feb. 14 https://www.nestle.com/asset-library/documents/library/presentations/sales_and_results/2018-full-year-results-press-conference-presentation.pdf

(2) https://ch.marketscreener.com/NESTLE-9365334/unternehmen/

(1) https://www.handelszeitung.ch/unternehmen/investoren-geben-paul-bulcke-saures?utm_source=Handelszeitung+Newsletter&utm_campaign=bf141dbd3a-LUNCH_TOPICS_2018_10_31_COPY_01&utm_medium

Nestle investor relations. 

 

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