Nestlé is the largest food and beverage company in the world. It owns more than 2.000 brands in seven product categories, with 31 of these brands being worth more than a billion. Nestlé has a global presence and a rich history dating back to 1866. Additionally, Nestlé has paid yearly dividends for the past 69 years. Therefore, Nestlé could be considered one of the best sleep-well-at-night investments in the market. In this analysis, I will investigate whether it is worth investing in Nestlé.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.7
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Nestlé. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Nestlé either. Thus, I have no personal stake in Nestlé. If you want to purchase shares (or fractional shares) of Nestlé, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
Nestlé is the largest food and beverage company globally. Founded in 1866 in Vevey, Switzerland, where it remains headquartered, Nestlé operates in seven product categories: powdered and liquid beverages (approximately 28% of sales), pet care (approximately 20% of sales), nutrition and health science (approximately 16% of sales), prepared dishes and cooking aids (approximately 13% of sales), milk products and ice cream (approximately 12% of sales), confectionery (approximately 9% of sales), and water (approximately 2% of sales).
Nestlé offers a diverse range of products, including baby foods, bottled water, cereals, chocolate, coffee, frozen foods, dairy products, ice cream, pet foods, and healthcare nutrition products. Its largest market is North America, followed by Europe, AOA (Asia, Oceania, and Africa), Latin America, and Greater China. Nestlé owns more than 2.000 brands, with 31 of these brands valued at over one billion CHF. Some of the most renowned brands owned by Nestlé include Kit Kat, Nespresso, Nescafé, Smarties, Nesquick, Perrier, Nestea, Stouffer's, Vittel, Purina, Nido, NAN, Maxibon, Garden Gourmet, and Maggi. These globally recognized brands give Nestlé its moat. Additionally, Nestlé holds a 20,1% stake in the French personal care company L'Oréal, further diversifying its business interests.
The CEO of Nestlé is Laurent Freixe, who joined Nestlé in 1986 and became CEO in 2024. He has extensive experience within Nestlé, having held various significant positions throughout his career. These roles include Head of the Nutrition Division of Nestlé France, CEO of Nestlé Hungary, CEO of the Nestlé Iberian Region, Executive Vice President responsible for Zone Europe, and CEO of Zone Americas, the largest region for Nestlé. Following Nestlé's new geographic structure in January 2022, Laurent Freixe was appointed Executive Vice President and CEO of Zone Latin America. With his broad experience managing two major Zones—Europe and the Americas—and his deep knowledge of Nestlé’s core categories, Laurent also supported the CEO in coordinating the Zones, all before becoming CEO in 2024. He has served as a member of Nestlé's executive board for 16 years, playing a key role in shaping the company's strategic direction. Laurent Freixe was educated at the Ecole des Hautes Etudes Commerciales du Nord in Lille and has also participated in the IMD Program for Executive Development in Switzerland. He is described as a popular figure at the headquarters and has stated that he intends to focus on Nestlé's core activities by continuing to support the company's key growth brands. He has also expressed a desire to accelerate organic growth rather than pursuing acquisitions. While it is too early to fully assess Laurent Freixe's performance as CEO, I am inclined to give him the benefit of the doubt due to his extensive experience within the company and his focus on organic growth.
I believe that Nestlé has a moat. However, there are some uncertainties regarding management due to its recent changes. Now, let us analyze the numbers to determine if Nestlé meets our criteria for possessing a strong competitive advantage. For an explanation of what the numbers represent, you can refer to the "MY STRATEGY" section on the website.
The first metric we will investigate is the return on invested capital (ROIC). Our criterion requires a 10-year history with all figures exceeding 10% annually. Nestlé has consistently delivered a ROIC above 10% over the past decade, demonstrating the company's quality and operational efficiency. Notably, ROIC has been quite stable throughout this period. It is particularly encouraging that Nestlé achieved its second-highest ROIC of the decade in 2023, despite the challenging macroeconomic environment. Management has expressed optimism about increasing profit margins in the future, which should positively impact ROIC. Therefore, there is potential for Nestlé to further improve its ROIC moving forward. However, even if ROIC does not increase, the fact that Nestlé has maintained a ROIC above 10% each year for the past ten years is a strong indicator of the company's robust financial health and operational effectiveness.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2013 as Finbox only provides data for the past ten years. At first glance, these numbers may appear discouraging, as equity has decreased in most years. However, several factors have influenced Nestlé's equity. One significant factor is the numerous acquisitions and disposals undertaken by the company. Another factor is Nestlé's strategic use of debt to buy back shares, a strategy that can be advantageous when interest rates are low. Therefore, I will not place undue emphasis on these figures in isolation.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Nestlé has managed to deliver positive free cash flow every year over the past decade. Free cash flow has decreased in the past four years due to the pandemic and subsequent macroeconomic challenges. However, it is positive to see that free cash flow grew in 2023 compared to the ten-year low point in 2022. Management has expressed a commitment to growing free cash flow, with expectations for continued growth in 2024 and beyond. The levered free cash flow margin also increased in 2023, which is encouraging despite being below the ten-year average. This margin is expected to grow moving forward. Additionally, the free cash flow yield is slightly above the ten-year average and at its highest since the pandemic, suggesting that the shares are trading at their most appealing valuation since that time. This is a point we will revisit later in the analysis.
Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of three years. This is determined by dividing the total long-term debt by earnings. Upon analyzing Nestlé's financials, I have determined that the company has 3,9 years of earnings in debt. While this is slightly higher than ideal, it is primarily due to Nestlé's strategic use of inexpensive debt to fund share repurchases. Given the recent increase in interest rates, I hope that management will prioritize debt repayment. Nonetheless, having 3,9 years of earnings in debt is not particularly concerning considering the size and financial stability of Nestlé.
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Based on my findings so far, I believe that Nestlé is an intriguing company. However, no investment is without risk, and Nestlé faces its fair share of challenges. Macroeconomic Factors: Several macroeconomic factors have affected Nestlé and may continue to do so in the future. For instance, food price inflation in 2022 and 2023 reached its highest level since 1974, impacting consumer spending significantly. Management has noted that it is not only the high level of food price inflation but also its steepness and unexpectedness in 2022, continuing into 2023, that has affected consumer behavior. Another macroeconomic factor influencing Nestlé is the strong Swiss franc. The strength of the Swiss franc resulted in a foreign exchange impact that was exceptionally negative, reducing net sales by 7,8% in 2023. Over the past decade, foreign exchange has had an average negative impact of about 3,5% per annum on Nestlé's sales. In 2023, this impact was twice as large. Therefore, if the Swiss franc remains strong, it will continue to affect Nestlé's financial performance. Another significant risk for Nestlé is competition. The industries in which Nestlé operates are highly competitive. The company faces competition from international corporations that operate in multiple markets, as well as from regional, local, and private label manufacturers. Private label manufacturers, in particular, could pose a short-term problem for Nestlé if a recession occurs, as their products are typically cheaper. Management has observed that customers are down-trading in food, shifting from purchasing more expensive brands to more affordable ones or from branded products to private labels. Additionally, customers have changed their cooking behavior, moving from prepared foods to cooking their own meals. Consequently, Nestlé faces competition not only from other large international companies but also from private labels and fresh food producers. A potential decrease in demand for some of Nestlé's products is another risk to consider. Management has noted that weight management has gained significant attention, largely due to the public success of GLP-1 drugs and their importance in helping many consumers achieve substantial weight loss. While management believes that Nestlé offers products that will benefit from this shift towards healthier consumer behavior, this change may also decrease demand for certain product categories. Specifically, the demand for products in Nestlé's powdered and liquid beverages, milk and ice cream, and confectionery categories may decline. Although it is uncertain to what extent Nestlé will benefit from changing consumer behavior in the future, it is almost certain that some of its product categories will be negatively impacted.
There are numerous reasons to consider investing in Nestlé, one of which is the company's focus on premiumization. Nestlé's premium products have higher margins compared to its other products. Over the past ten years, Nestlé's premium products have grown at a healthy pace, with sales increasing at a compounded annual growth rate of 11,5%. This growth has led to the contribution of premium products to total sales increasing more than threefold, from 11% to 36%. Management has noted a strong and growing interest in premium products in developed markets. This is significant as premium products typically command a price premium of 20% or more over mainstream offerings in the category. Therefore, as Nestlé continues to see increased demand for its premium products, it is likely to lead to higher profitability in the future. Portfolio improvements. Nestlé continues to focus on exiting unprofitable stock-keeping units (SKUs). Management has indicated that since the summer of 2022, Nestlé has discontinued approximately CHF 700 million of annualized revenue from these unprofitable SKUs. These discontinued SKUs provided little growth and no profitability. Management has noted that the net benefit of exiting these low-growth, unprofitable SKUs is beginning to manifest. Going forward, the absence of this long tail of low-growth, unprofitable SKUs will be a significant boost for Nestlé. Although revenue will be impacted in the short term by the exit of these SKUs, the overall profitability of the company is expected to improve in the future. Capitalizing on an Aging Population. Management has highlighted the potential of healthy aging solutions as a major trend moving forward. They believe that this presents a significant opportunity in many large economies due to the aging population. Nestlé recognizes that nutrition plays a crucial role in preventing non-communicable diseases and ensuring that people enjoy longer and more active lives. This trend is expected to benefit Nestlé's health science products significantly. However, management also believes that Nestlé's dairy and food segments will contribute importantly to this goal by helping people avoid diseases and maintain their health.
Management has identified four key themes related to aging that will benefit Nestlé: maintaining an appropriate weight, preserving lean muscle mass, ensuring an adequate intake of micronutrients, and avoiding unnecessary sugar spikes. Nestlé offers products that can meet all these growing needs, positioning the company to benefit from this enduring trend.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 4,23, which is from 2023. I have selected a projected future EPS growth rate of 8%. Management expects EPS to grow by 6%-10% moving forward. Additionally, I have selected a projected future P/E ratio of 16, which is twice the growth rate. This decision is based on Nestlé's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be CHF 36,12. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Nestlé at a price of CHF 18,06 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 15.941, and capital expenditures were 5.714. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 4.000 in our calculations. The tax provision was 2.314. We have 2.668 outstanding shares. Hence, the calculation will be as follows: (15.941 – 4.000 + 2.314) / 2.668 x 10 = CHF 53,43 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Nestlé's Free Cash Flow Per Share at CHF 3,83 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is CHF 44,00.
I believe that Nestlé is an intriguing company. Nestlé has consistently delivered a high return on invested capital (ROIC), indicating its high quality as a company. Although free cash flow has not yet returned to pre-pandemic levels, management expects growth in this area moving forward. Nestlé is currently facing some macroeconomic challenges, such as high food inflation and a strong Swiss franc. These factors will impact Nestlé's financial performance as long as they persist, though they are expected to improve over time. Competition is a long-term risk, given that Nestlé operates in highly competitive markets. The company is not only competing against other international companies but also against private labels. Management has noted that consumers have switched to private label products, and it is uncertain whether they will revert to branded products once the economy improves. While Nestlé believes it will benefit in the long term from a shift in consumer behavior towards a healthier lifestyle, it remains uncertain to what extent this will happen. It is likely that some product categories will suffer from this change in consumer behavior, and it is not clear if increased sales in other categories will compensate for the loss. Nestlé's focus on premiumization has led to premium products now contributing significantly more to sales than they did ten years ago, benefiting the company due to higher margins. Additionally, Nestlé is optimizing its portfolio by exiting unprofitable and slow-growing stock-keeping units (SKUs), which should benefit the company in the long term. Management believes that Nestlé's product offerings are well-positioned to benefit from an aging population. As the population continues to age, this could serve as a long-term growth catalyst for Nestlé. Overall, I believe that Nestlé is a quality company, and such companies are rarely available at a discount. Nonetheless, I prefer to have a small margin of safety. Therefore, I will consider buying shares below CHF 80, which provides a small discount to intrinsic value based on two out of three valuation calculations.
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