Monday 10 March 2014

Analysis of Nestlé

A Swiss consumer products company

Company: Nestlé

Business: A Swiss consumer products company. The main focus is within nutrition, health and wellness. To mentioned a few of their brands then: Gerber, Perrier, KitKat, Smarties, Nescafé, Maggi and for the more complete list please look here.

Active: They are a complete diversification on their own and are present on each continent in the world, selling their products and well known brands. In total they have around 340,000 employees.

P/E: 21.5

This company was analysed due to a request that can be found here and John wanted that to be able to better compare Unilever with one of its competitors.

contrarian values of P/E, P/B, ROE as well as dividend

The P/E is far too high for me (unless it is an extreme growth company) with 21.5 and the P/B is also no laughing matter with 3.4 which gives a very clear no according to Grahams formula. The earnings to sales are looking pretty ok with 11% and in line with competitors but the ROE is low with only 16 (still generally looking a ROE of 16 is pretty ok). The book to debt ratio is also good with 1.1. However in the last five years they have had a negative yearly growth of -3.1% which then gives us a max motivated P/E of 9 to 12 and today the company is therefore highly overvalued on the market. They spend some money on research to the quantity of 15% which is low and especially considering that they have had decreasing revenue at the same time as they have been decreasing their research and development so the classical failure calculation that an economist can make while only sticking around in the company for a couple of years. If revenue is dropping one must increase research and development or you have to be prepared to pay a lot for smaller companies that have developed what you need. They pay an ok dividend of 3.2% which on the other hand represents almost 70% of their earnings so in line with what water and electricity companies are paying out which shows how little future they see and at the same time they have been buying back shares which in a way is saving them.

Conclusion: To me Nestlé is an overvalued, none future thinking company that probably already to day have reached close to their maximum revenue and they are more likely to grow with inflation + a little bit. Also Graham is very negative to this company due to the bad P/E, P/B, yearly growth and high %-age of profits being paid out to the shareholders which is usually to keep the institutional investors wheels greased. So in comparison to Unilever I would in each case pick Unilever. So maybe we should add to their logo "Good Food, Good Life but bad for investors".

If this analysis is outdated then you can request a new one.


Chris Bailey said...

Yes i share your feeling about the share at the moment. CHF64 is quite interesting, CHF60 more interesting (my own recent thoughts here: One technical did you account for the L'Oreal holding?

Keep up the good work, hope the jet lag is not too bad.

Fredrik von Oberhausen said...

I always take the annual report as it is presented to me and make no recalculations of holdings and the intrinsic value of that holding. I know that it might become a downside for me in the long run but I want to run the experiment long enough before I start to change.

I am happily ok again now! Thanks!

John Magic said...

Thanks Fredrik for the analysis! :)

Maybe this is the kind of share you could pick up in a major financial crisis.

Fredrik von Oberhausen said...

You are welcome John Magic!

Yes, I fully agree on that!

Oh, and that Unilever can be bought today.