Investing Strategy: Nestle

Showing posts with label Nestle. Show all posts

Nestle versus Dutch Lady (A Comparative Study)

	3.4.2012	3.4.2012
	Nestle	Dutch Lady


Income Statement
	31/12/2011	31/12/2011
	RM (m)	RM (m)
Revenue	4,700.99	810.65
Gross Profit	1,542.12	304.47
Operating Profit	579.428	139.372
Financing costs	-21.398	-0.919
PBT	558.809	141.553
PAT	456.301	108.082

EPS (basic) sen	194.58	168.88
EPS (diluted) sen



Balance Sheet
NCA	987.259	74.048
CA	1015.064	324.465
Total Assets	2002.323	398.513

Total Equity	640.86	259.154
NCL	446.723	4.051
CL	914.74	135.308
Total Liabilities	1361.463	139.359
Total Eq + Liab	2002.323	398.513

Net assets per share	2.730	4.05


Cash & Eq	52.461	193.143
LT Borrowings	337.711	0
ST Borrowings	4.223	0
Net Cash	-289.473	193.143


Inventories	517.573	93.448
Trade receivables	444.854	36.713
Trade payables	878.321	121.831


Quick Ratio	0.54	1.71
Current Ratio	1.11	2.40



Cash flow statement
PBT	558.809	141.553
OPBCWC	681.492
Cash from Operations	640.247	188.290
Net CFO	581.844	161.940
CFI	-90.683	-7.135
CFF	-461.013	-47.319


Capex	-93.015	-10.882
FCF	488.829	151.058

Dividends paid	-398.650	-46.400
DPS (sen)	180.00	72.5

No of ord shares (m)
basic	234.5	64
diluted


Financial Ratios

Gross Profit Margin	32.80%	37.56%
Net Profit Margin	9.71%	13.33%
Asset Turnover	2.35	2.03
Financial Leverage	3.12	1.54


ROA	22.79%	27.12%
ROC	49.05%	163.73%
ROE	71.20%	41.71%


Valuation	3.4.2012	3.4.2012

Price	55.9	36
Market cap (m)	13108.55	2304.00

P/E	28.73	21.32
P/BV	20.45	8.89
P/FCF	26.82	15.25
P/Div	32.88	49.66

DPO ratio	0.87	0.43

EY	3.48%	4.69%
FCF/P	3.73%	6.56%
DY	3.04%	2.01%

Nestle - Projecting its future

Nestle				CAGR	CAGR
	15.3.12	31.12.10	31.12.06	2006-2010	2006-2011
	2011	2010	2006	4 Years	5 Years
Market Price $	56.3	43.34	24.8	17.82%	14.98%
Turnover $	4,700,994	4,026,319	3,275,541	7.49%	5.29%
Earnings (sen)	194.58	166.91	112.67	11.55%	10.32%
Div (sen)	180	165	100	12.47%	13.34%


P/E	28.9	26.0	22.0
EY	3.46%	3.85%	4.54%
DY	3.20%	3.81%	4.03%

Projections of Nestle using the following assumptions:
- EPS GR of 8% per year, that is, its earnings double in 9 years from 2011.
- At the end of the 9 year period in 2020, its intrinsic value was at PE of 22x.

	Projections		EPS GR 8%	Projections
	PE 22	15.3.12	CAGR	Using Historical Price

Year	2020	2011		2020
Market Price $	85.6152	56.3	4.77%	56.3
Turnover $		4700994
Earnings (sen)	389.16	194.58	8.01%	389.16
Div (sen)	360	180	8.01%	360

P/E	22.0	28.9		14.5
EY	4.55%	3.46%		6.91%
DY	4.20%	3.20%		6.39%

Using the above 2 CONSERVATIVE assumptions, you can expect a total return per year of about 9.6% if you were to invest into Nestle today. This return is derived thus: about 4.77% from capital appreciation and about 4.8% from dividends.

The more enterprising investor may wish to look for investments with a higher return of 15% or more. Nevertheless, a return of 9.6% is good for many.

Please note that the projections are over a long period of 9 years. Over the short term, the price of Nestle can be volatile too and your return may even be negative depending on the price you paid to own it.

Graham defined investment thus: An INVESTMENT OPERATION is one which, upon THOROUGH ANALYSIS, promises SAFETY OF PRINCIPAL and a SATISFACTORY RETURN. Operations NOT meeting these requirements are speculative.

Nestle revisited

In the year 2001, the after tax EPS of Nestle was 87 sen. and its share price was trading between $19.30 to $21.20, with a P/E ranging from 22.2 to 24.4.

For someone who bought Nestle in 2001, where was the margin of safety of this company?

Margin of safety in a company comes from various sources. Among these are the qualitative factors which are difficult to quantify mathematically. Nestle has durable competitive advantage and economic moat. The only assessment for the investor is to "guess intelligently" what its earnings growth will be over the next few years.

Margin of safety concept can be applied in two ways. One that is obvious is buying a company at a big discount to its intrinsic value. Of course, intrinsic value is not easy to determine and does vary widely depending on the assumptions one makes in deriving this value. Another method that is not obvious, is the margin of safety that exists too when the present price that you are paying is at a discount to its intrinsic value based on its growth projections, conservatively estimated.

Let's look at Nestle. In 2001, you were paying 22.2 times for $1 of its after tax earnings. Was this underpriced, fair price or overpriced relative to its intrinsic value, conservatively estimated based on its growth potential? Growth projections are at best intelligent guesstimates. Nestle was projected to grow its business profit at 8% per year at that time. Therefore in 9 years from 2001, it was projected then to have an EPS of 2 x 87 sen = 174 sen.

Assuming that Nestle in 2010 had the same PE of 22.2, its share price in 2010 should be 22.2 x 174 sen = $.38.63, or CAGR of 8%. The average DY of Nestle was 4%. Nestle paid out virtually all its earnings as dividends. Therefore, its DY in 2001 based on historical cost was 4% but in 2010, its DY based on historical cost was 8% (dividend paid had also doubled). This was an average dividend yield of about 6% per year for that period. Should you have reinvested all the dividends back into Nestle, you would probably be able to compound your initial investment at more than 14% per year.

So, in 2001, Nestle's PE was 22.2x. Yet, knowing its earning growth potential, conservatively estimated, there was margin of safety even buying at this price, with a reasonable degree of probability. Using a conservative growth estimate in earnings of 8% per year, its earnings was projected to double in 2010. Based on this EPS projection, its (future) intrinsic value would be higher and herein was the margin of safety demanded by the value investor.

Such way of investing may not appeal to some investors. It is too difficult for them to realise that growth creates value. One should be happy to pay a higher PE to own a stock of higher quality, better earnings growth, lesser risk and greater certainty of a positive sustainable return.

Buying a wonderful company at a fair price has made those who know how, very rewarding and rich indeed. There is no reason to change something that has worked consistently over 2 decades of investing.

Nestle

Closing price on 14.3.2012
$56.30

How does an investor hope to profit from investing into a high quality growth company?

He can obtain his returns from:
1. The dividends distributed by the company.
2. The share price appreciation that reflects the better earnings of the company over time.
3. Buying the share at a bargain to its fair or intrinsic price.

The long term investor will derive most of his gains from dividends and the share price appreciation of the above stock.

Let's assume that the investor was poor in his pricing of this stock and bought in 1996 at $24 per share (the highest price for that period), he would still has a lot of gains from the dividends and share appreciation of this stock when he holds this share to today.

If the investor was very good in his pricing of this stock and bought at the lowest price in 1998 at $13 per share, he would have a better return from the dividends and share appreciation of this stock when he holds this share to today.

The "worse" case scenario is not buying into this stock and holding cash, hoping to buy at very steep bargains that never arise. The opportunity costs for holding cash instead of being invested into this stock over the short and long term can be very costly.

Nestle posts higher pre-tax profit

Published: 2012/02/23

Nestle (Malaysia) Bhd's pre-tax profit for the financial year ended Dec 31, 2011 jumped to RM558.81 million from RM465.74 million previously, driven by growth in export and domestic sales.

Revenue for the year rose to RM4.70 billion from RM4.03 billion a year ago.

The company has declared a final dividend of 125 sen a share (tax exempt) totalling RM293.12 million, payable on May 30, 2012.

On the domestic front, the excellent results were driven by solid performance in many product categories.

Focus on fewer but bigger innovations and renovations helped the group launch new exciting products to capture new market segments and support the overall growth, Nestle said in a filing to Bursa Malaysia today.

It said the most recent launch of Nescafe Dolce Gusto Beverage System has been well received by the market, while earlier launches such as Milo Sejuk, Nestle Crunchy Bite wafer and Nestea Ice Lemon Tea, also showed positive sales trend.

The group exports its products globally, of which more than half were contributed by the ASEAN region.

"Benefitting from the resilient and strong economic performance in this region, exports continue to grow at double-digit and represent almost 25 per cent of total sales," it added.

Nestle said it expects 2012 to be a very challenging year as many uncertainties could dampen global economic growth and further drive volatility in commodity costs.

The group will continue to capitalise on product innovation and renovation as well as promoting nutritional diets and healthy lifestyles in line with the government's goal of creating a healthy and productive society, it said.

It will remain focused on growing both top and bottom lines this year. "The group will continue to intensify its marketing investment in line with our objective of being the leader in nutrition, health and wellness, become an industry benchmark for its financial performance as well as maintain our stakeholders' trust," it added. -- BERNAMA