Shares in focus: Nestlé

Nestlé is the world's largest manufacturer of food products, with a host of well-known brands. This makes the Swiss giant a solid defensive play. But with the very strong Swiss franc hurting exporters, is it the right time to buy? Phil Oakley investigates.

By Phil Oakley

published 2 September 2011

in Features

What is Nestl?

Nestl is the world's largest food and nutrition company. Its brands are split into five main areas: beverages (Nescaf coffee and Perrier, Vittell, and San Pellegrino waters); milk products; nutrition and ice cream (Milo, Nesquick, Powerbar, Skinny Cow); prepared dishes and cooking aids (Maggi, Buitoni, DiGiornio); confectionery (Kit Kat); and pet care (Purina and Friskies). Combined sales were CHF109bn in 2010.

What is the company's history?

Pharmacist Henri Nestl founded the firm in 1866 when he developed a formula milk product for infants. The company then expanded into condensed milk products. That led to its merger with Anglo-Swiss Condensed Milk Company in 1905. The early 20th century saw expansion across Europe, Asia and the US, and a move into chocolate. Nescaf coffee was launched in 1938. The post-war years saw rapid growth and the acquisition of prominent food brands such as Maggi, Findus, Crosse & Blackwell, Stouffer's, Carnation and Rowntree's. During the 1970s, Nestl attempted to diversify by buying a stake in L'Oral and purchasing Alcon Laboratories (sold in 2010). In recent years there has been increased emphasis on research and innovation (eg, Nestl Nutrition) and on selling complementary products such as coffee machines.

Who runs Nestl?

Paul Bulcke has been chief executive officer since 2008, having joined the firm as a marketing trainee in 1979. His total compensation was CHF10.6m in 2010. The previous CEO, Peter Brabeck-Letmathe, is chairman. James Singh is finance director.

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How is trading?

Results for the six months to June 2011 saw sales fall by 5% to CHF41bn with operating profit falling by 3.6% to CHF6.2bn. This was largely due to the strength of the Swiss franc. Good cost control partially offset higher raw material prices to protect operating margins. Excluding exchange rates, Nestl delivered organic sales growth of 7.5% with increases across all divisions. The performance of the water division was, however, disappointing increased competition in North America and high cost inflation saw profits fall by over 20%.

What's the outlook for Nestl?

The company is cautiously optimistic for the rest of 2011. While consumer confidence is subdued, it expects a combination of price increases and volume growth to deliver overall sales growth of 5%-6%. Ongoing cost savings are expected to offset input price increases and maintain margins. However, the strength of the Swiss franc (as a safe-haven currency) is a worry for all Swiss exporters and could remain a drag on reported sales and profits.

The analysts

Of the 44 analysts surveyed by Bloomberg, 19 say "buy", 21 "hold" and two "sell". The average price target is CHF54 9% above the current share price. Most bullish is Sanford C Bernstein with a target of CHF64. JP Morgan is most bearish with a target of CHF45.

Our view

Nestl is a solid defensive play with a decent dividend. However, it isn't cheap and, with the Swiss franc surging, investors should hold back for now.

The numbers

Stock market code: NESN

Share price CHF49.6

Market cap : CHF173.4bn

Net assets (June 2011) CHF52.5bn

Net debt CHF14.5bn

P/E (current year estimate) 16.2

Yield (prospective) 4.40%

Directors' dealings

Although Nestl does not have a formal share ownership policy for its directors, there have been plenty of purchases during the last year. CEO Paul Bulcke's is the most notable a purchase of nearly CHF5m shares on 29 March. It is encouraging to see that other directors have also invested significant amounts of money in the firm's shares. Purchase dates are shown in the chart, number of shares heldlisted below.

Director and shares held

P Bulcke: 124,672

J Singh: 5,219

JM Duvoisin: 12,822

N Nandikishore: 3,430

P Heynike: 18,317

J Bauer: 11,448

D Frick: 1,631

D Borel: 20,000

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.