Tag: Indian Market
With sales from premium products across categories estimated at around 26% of group sales and accounting for more than 50% of Nestle’s organic growth in fiscal 2019 in our calculations, we see heightened downside risks from recession-driven downtrading to cheaper private-label alternatives. The emergence of hard discounters selling private-label products and the threat of the online channel lowering barriers to entry for smaller, nimbler manufacturers that have proved to be more adept at identifying the niche opportunities are headwinds for large-scale consumer packaged goods firms.
Aside from structural cost-cutting efforts, the management team has put a lot of weight on reinvigorating growth through active portfolio management, resetting legacy businesses, and further investment in high-growth categories (coffee, pet care, water, and nutrition). Further, population growth, urbanisation, and economic growth are secular drivers in emerging markets, where the company sources a sizable and growing share of its sales, which should support medium-term volumes, though at a lower level than historical averages.
Financial Strength
Nestle has one of the strongest balance sheets in packaged food, and we regard it as having a low liquidity and refinancing risk profile. Nestle’s net debt/EBITDA of 1.4 times at the end of 2019 is well below its peer group average of around 3.0 times, and EBITDA covered interest expense by a very comfortable 16 times in 2019. Nestle faces maturities of around CHF 2 billion in 2020, CHF 4 billion in 2021, and CHF 2.7 billion in 2022, which we see as manageable, given the firm’s prodigious cash generation (10% average free cash flow to the firm as a percentage of sales over the past decade) and access to refinancing debt.
Leveraging the balance sheet to a level in line with peers could raise more than CHF 20 billion in additional capital. Further, Nestle owns 23% of wide-moat L’Oreal, a stake that could raise close to CHF 20 billion at our fair value estimate. With approximately CHF 2 billion more in excess cash on the balance sheet, Nestle has a potential pool of capital of more than CHF 40 billion, which would allow it to execute a transformative acquisition of a large-cap name. Nestle has historically spent CHF 1 billion-3 billion of its roughly CHF 10 billion in annual free cash flow on bolt-on deals. Nestle generates around CHF 4 billion per year in free cash flow after the dividend has been paid. Nestle could still deleverage to less than 1 time net debt/EBITDA by fiscal 2024 due to its improved profitability, leaving ample room for large acquisitions.
Nestle’s Geographic Reach
- The breadth and diversity of Nestle’s portfolio and its geographic reach allow for easier absorption of brand and operational shocks.
- Nestle’s global distribution network and entrenched supply chain relationships render the company one of the most effective platforms to develop and expand brands on a global scale (as seen in its latest partnership deal with Starbucks).
- With margins lagging some of its large-cap peers, there should be plenty of low-hanging fruit with which Nestle could improve its financial performance.
Company Profile
With a 150-year-plus history, Nestle is the largest food and beverage manufacturer in the world by sales, generating more than CHF 90 billion in annual revenue. Its diverse product portfolio includes brands such as Nestle, Nescafe, Perrier, Pure Life, and Purina. Nestle also owns just over 23% of French cosmetics firm L’Oreal. The company has a vast portfolio of global products, with 34 brands each achieving more than CHF 1 billion in sales annually and a geographic presence that spans 189 countries.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
