By Andrew Bary
Nestlé is the world's largest food company -- but over the past five years, its stock has been a disappointment. It might be the right time to snap up shares of the 158-year-old Swiss giant.
With its cupboard full of some 30 popular brands -- including Perrier, Nescafe, and Gerber -- that generate over $1 billion in sales and more than $100 billion in total revenue last year, Nestlé shouldn't have trouble growing its business. But the company has reported weak sales volume in recent quarters. A key sales volume measure was down 2% in the first quarter versus the year-earlier period, 1.5 percentage points below the consensus. Pricing was up just 3.4%, compared with 7.5% last year, amid consumer pushback against sharply higher food costs.
It was just the latest disappointment, and sentiment toward the company since 2022 has gone from "hope to despair," in the words of Bernstein analyst Bruno Monteyne. Nestlé's U.S. shares (ticker: NSRGY), which trade over the counter, have fallen 15%, to $105.47, during the past year, lagging behind the S&P 500 index, which has gained more than 25%.
There is reason for hope. In a late-April conference call, CEO Mark Schneider said that first-quarter sales were affected by one-time factors, including a drop in U.S. government payments to low-income families, and that volume will rebound in the coming quarters. He was "very confident" about hitting Nestlé's goals of 4% growth in organic sales this year and a 6% to 10% annual gain in earnings per share, adjusted for currency movements. The company's adjusted EPS were up 8% in 2023, and this year are expected to be at the lower end of the 6% to 10% range. Making those numbers, particularly at a time when shares no longer trade at a premium to other staples, could get the stock moving in the right direction again.
"The company has missed expectations, management reputation has taken a knock, and the stock has lost its premium, but the company has a good opportunity to get that back by putting up decent results in the second quarter and second half of 2024," says Jeremy Fialko, an analyst at HSBC in London. He has a Buy rating and target price of about $128 on the U.S. shares, up 21% from Thursday's close.
Nestlé trades for about 19 times projected 2024 earnings of $5.50 a share, only slightly higher than European rivals Unilever and Danone, while in line with Nabisco parent Mondelez International and below PepsiCo and Coca-Cola. But Nestlé is even cheaper than it looks. Its effective price/earnings ratio is closer to 15 when adjusted for its 20% stake in French cosmetics company L'Oréal, which is worth over $50 billion. Schneider has been noncommittal on the sale of the stake, which has appreciated sharply in the past decade.
A sale of the L'Oréal stake could help fund a big stock repurchase, but such a dramatic move isn't in keeping with the company's more deliberate style. Nestlé attracted an activist in 2017 when U.S. investor Dan Loeb of Third Point took a stake of more than 1% and pushed for a sale of the L'Oréal stake. Nestlé sold a 4% interest in L'Oréal in 2021 and kept the remaining 20%.
That's fairly typical of Nestlé. The conservative company doesn't like to make major moves, though it has sped up product development in recent years and pivoted more toward health and nutrition via acquisitions -- including the purchase of the parent of Nature's Bounty supplements in 2021, one of a series of smaller deals in recent years. A few have bombed, notably the buy of prepared-meal maker Freshly.
On the company's April conference call, Nestlé brass was asked about reports of potentially major restructuring actions to cut costs and boost margins. "We're not into big-style, slash-and-burn restructurings and have no intention of going there," Schneider said. "We see them as disruptive."
Nestlé's admirers like this approach. "Nestlé has a portfolio of coveted consumer brands," says Tom Russo, a managing member of Gardner Russo & Quinn. "It has a management team prepared and willing to make investments for the long-term creation of wealth for shareholders." He has held the stock for clients for 40 years.
Russo points to the success of Nespresso, its Keurig-like coffee business popular in Europe that uses a razor-and-blade model involving a coffee maker and Nespresso coffee capsules that are typically sold directly to consumers. Nestlé invested several billion dollars to develop Nespresso, which generated $7 billion in sales last year with 20% margins.
HSBC's Fialko views pet food, sold under brand names like Purina, and coffee as two of Nestlé's better businesses. Nescafe, the company's instant coffee, is popular in the developing world, where the company is seeking to lure consumers away from tea. KitKat is the company's flagship candy, with Nestlé selling the chocolate bar outside the U.S. -- including in Japan, where it comes in multiple flavors. Hershey has the rights in the U.S.
Nestlé operates in nearly 190 countries and gets about 40% of its sales from the developing world, where rising wealth and population offer growth opportunities largely absent in the West.
The company also has pursued a strategy of developing higher-priced products in numerous categories, including coffee, pet food, and bottled water, that carry higher margins. Premium products account for over a third of sales, against 11% in 2013.
"Nestlé is a Tier 1 company with a wide moat," says Ioannis Pontikis, a Morningstar analyst. "It's one of the highest-quality names in the space. It offers a good total return for long-term investors."
It has a secure 3% dividend, although U.S. investors can be subject to a withholding tax on it. Nestlé bought back over $5 billion of stock last year, about 2% of the shares outstanding, and similar repurchases are expected this year.
Add it all up and that's a tasty return.
Write to Andrew Bary at andrew.bary@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 17, 2024 11:34 ET (15:34 GMT)
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