Nestle S.A. (OTCPK: NSRGY) is the world’s largest food and beverage company with operations in 189 countries across the globe. The company has over 2000 products in its portfolio and is well diversified across various consumer defensive operating segments.
The company recently announced its first-quarter results and reported a solid start to the year, which is fully in line with the company’ guidance for 2018. Growth was broad-based across geographies. It was also in line with the expectation the company articulated in February that its 2018 organic growth would improve over the levels it saw in 2017.
Key highlights from the recent results:
- Organic growth of 2.8%, with 2.6%-real internal growth (RIG) and pricing of 0.2%.
- Total sales increased by 1.4% on a reported basis to CHF 21.3 billion (3M-2017: CHF 21.0 billion). Net acquisitions had a positive impact of 0.2% and foreign exchange reduced sales by 1.6%.
- Portfolio management strategy on track. The acquisition of Atrium Innovations was completed at the beginning of March, and the sale of the U.S. confectionery business concluded at the end of March. Agreements reached to acquire Terrafertil and to divest the waters business in Brazil.
- Full-year guidance for 2018 confirmed.
Three-month performance highlights:
Key guidance for 2018:
- Organic sales growth of 2% to 4%
- Underlying trading operating margin improvement in line with 2020 target
- Restructuring costs are expected at around CHF 700 million
- Increase in underlying EPS** and capital efficiency
In another announcement made on 7 May, the company announced an agreement granting the company the perpetual license to market Starbucks consumer and foodservice products globally, outside of Starbucks coffee shops, that are not part of the transaction. The business included in the agreement generated approximately USD2.0 billion of revenues in 2017. As part of the transaction, Nestlé will pay an up-front cash payment of USD7.15 billion. The deal is expected to close by the end of 2018
The transaction does not include the transfer of any fixed assets, which facilitates a smooth and efficient integration. Nestlé expects this business to contribute positively to its earnings per share and organic growth targets as from 2019. Nestlé’s ongoing share-buyback program will remain unchanged.
This global coffee alliance will bring the Starbucks experience to the homes of millions more around the world through the reach and reputation of Nestlé. Moreover, the transaction is a significant step for its coffee business, Nestlé’s largest high-growth category.
Analysts tracking the stock believes that the company’ business risk profile continues to remain robust, led by its consumer defensive businesses, highly diversified market risk profile, and exhaustive product profile involving more than 2,000 brands. Furthermore, continuous diversification of the product profile through successful new launches has helped the company sustain growth and reduce dependence on a few flagship brands.
Moreover, NSRGY’ financial profile is also expected to remain comfortable, supported by high cash generation as reflected in its attractive dividend yield, moderate CapEx plans, and prudent working capital management. Liquidity continues to remain robust led by sizeable cash surpluses, and the company has approximately $10 billion in cash/short-term investments and $6 billion in long-term investments. Existing financial flexibility, along with an expectation of stable cash flow generation from operations are sufficient to cover the group’s capital expenditure, dividend payments, and short-term debt.
Considering all this, the company is in an extremely favorable risk-reward position, and value investors should consider exposure in this defensive play. Also, NSRGY defensive business assures capital protection along with a stable dividend yield. The present consensus target for the company is $84.50, with a high estimate of $100.00 and a low estimate of $70.00.
First Quarter 2018 Results:
Revenue: Organic growth reached 2.8% and was within guided range for 2018. Excluding the U.S. confectionery business, organic growth was 2.9%. RIG accelerated to 2.6% and continued to be at the high end of the food and beverage industry. Pricing was 0.2%, mainly reflecting lower levels of inflation in emerging markets. Net acquisitions increased sales by 0.2% as the acquisition of Atrium Innovations was completed at the beginning of March. Foreign exchange had a negative impact of 1.6%. Total sales increased by 1.4% on a reported basis to CHF 21.3 billion. All categories had positive growth, led by petcare, coffee, and Nestlé Health Science.
Growth by-products:
Unique differentiating factors:
- Stable business profile, led by its number one position as the largest food and beverage group in the world by revenues;
- Well diversified regarding business segments, product, and geography, with an improving presence in emerging markets;
- substantial asset base that could be monetized, including its investment in L’Oréal S.A.
- Focus on cost efficiency and continued strong brand equity which mitigates price and economic volatilities.
Risk factors:
The company has a high long-term debt of $27 billion, and Starbuck deal could deteriorate company’ liquidity to an extent. Nevertheless, Nestlé’s liquidity profile is expected to remain strong. Nestlé also benefits from its 23.2% stake in L’Oréal, which could also be, monetized if necessary.
The fast-moving consumer goods (FMCG) industry has organized and unorganized players across segments. Therefore, players such as Nestle need to regularly introduce innovate products, introduce differentiators and refreshes, and build on their reach and distribution to sustain market share as well as profitability.
Stock Chart:
Comments:
- On Wednesday, June 6th, 2018, NSRGY closed at $75.37, on an average volume of 456,676
Shares are exchanging hands. Market capitalization is $227.56 billion. The current RSI is at 38.16
- At $75.37, shares of NSRGY are trading below its 50-day moving average (MA) at $77.30 and below its 200-day moving average (MA) at $82.32
- The present support and resistance levels for the stock are at $74.0767 & $76.0167 respectively.
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