Blog: You, us, everyone

Nestlé - NESN

Nestlé, based in Vevey, Switzerland, is one of the world’s largest and most important food and beverage companies. Nestlé has a successful business history of more than 150 years, and today, it has acquired a solid and well-diversified portfolio of product brands which provides the company with a higher leveraging capability than its competitors. The company markets brands such as Nestlé, Nescafe, Jenny Craig, Perrier and Pure Life, and  also holds a number of high-level participations in a number of well-known companies such as L’Oreal (>30%).

In more recent times, Nestlé has started to review its portfolio of brands and participation with the aim of refocusing its business. In this context, it has sold its 10% participation in the Geneva based flavor and fragrance group, Givaudan, its numerous participations in some smaller water distribution companies, and other participations it has in non-core businesses and underperforming assets. 

Given its commitment to refocus on  core business, it could well be the case that its participation in L’Oreal will be disposed of in the coming quarters. This participation is valued at about €17.5 billion to €18 billion, or about 13.5% of Nestlé’s total market value. Therefore its disposal would open up new perspectives for bolt-on acquisitions to reinforce Nestlé’s core business, or buy back shares, or  reduce debt levels.

As one on the world’s largest food and beverage companies, Nestlé owns more than 20 brands, each of which can generate annual sales in excess of CHF 1 billion. Through its dominant position, the company is in a favourable position to negotiate key shelf space for its products which helps to ring-fence its products from new entrants.  

As one of the key players in the nutrition industry, Nestlé embarked relatively early on developing strategies to exploit secular growth trends in the emerging markets. This growth strategy has not always been seamless (e.g. powdered milk in Latin America, spring water in the US); however, the company navigated the concerns with the help of an appropriate BCP. In more recent times, Nestlé has focused more on acquisitions of well-established businesses rather than getting involved in the launch of start-ups and the like. The acquisition of Pfizer's infant nutrition business in 2012 clearly emphasized its intentions and willingness to remain a key influencer in the nutrition business.

Nestlé generates an annual turnover of over CHF 90 billion, of which around 45% is generated in emerging market countries. While in recent times consumption in EMA  was only somewhat battered by uncertain economic conditions and austerity measures, the company paid a relatively high price in DM  as a result of these conditions. Despite this, the company’s guidance is positive as annual growth should stay in the region of 5 to 6%. Furthermore, it can be expected that the company will continue to deliver operating margins in the region of the historic average figure of 15%. 

Strengths and weaknesses analysis / Fundamental analysis:
Strengths: 

• Brand recognition is extremely strong,
• Nestlé is the largest packaged food company and its products enjoy key positions on supermarket shelves,
• Nestlé holds key positions for a large array of products in the nutrition market, including pet food,
• The pet food segment is growing fast and better than Nestlé’s traditional business,
• Management has embarked on a global rethinking of its brands and participations. Non-core businesses and underperforming units are being sold,
• The L’Oreal participation (>30%) could be disposed of this year. This could open an opportunity to purchase a new bolt-on acquisition which could further develop and extend the business in the faster growing EM countries, 
• Historically, Nestlé has generated ROIC in excess of its WACC, and this is not expected to change in the future.
   

Weaknesses:

• Due to economic concerns, Nestlé’s customers could switch to lower-priced, store brand or private label products, and may not return to Nestlé’s key brands when the economy recovers,
• The company’s traditional nutrition market share in DM is declining, 
• Nestlé faces stiff competition from companies such as Coca-Cola, Pepsi in bottled water, Kellogg in breakfast cereal, and Mondelez in confectionery, 
• As the company has reached its maximum velocity, sales will only grow around 4% per annum in the foreseeable future.