Nestlé: A Blend of Stability and Opportunity.

Nestlé is the world’s largest food and beverage company, with a diverse portfolio spanning coffee, dairy, confectionery, pet care, and nutrition. Its global scale, strong brand recognition, and extensive distribution network have cemented its position as a leader in the industry. With a strategic focus on product innovation, health and wellness, and premiumization, Nestlé continues to adapt to evolving consumer trends. The question remains: Should this consumer goods giant have a place in your portfolio?

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.

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. 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 $50.

The Business

Nestlé is the largest food and beverage company in the world, operating across 185 countries with an extensive portfolio spanning seven key product categories: powdered and liquid beverages, pet care, nutrition and health science, prepared dishes and cooking aids, milk products and ice cream, confectionery, and water. With over 2.000 brands, including 31 brands valued at over CHF 1 billion, Nestlé's product reach extends into nearly every household globally, making it one of the most deeply entrenched companies in consumer staples. Nestlé's strength lies in its ability to serve consumers at every stage of life, from infancy to old age. Its diverse product offerings cater to different income levels, ranging from affordable essentials to premium offerings, ensuring resilience across economic cycles. The company's focus on nutrition, health, and wellness drives innovation, reinforcing its relevance in evolving consumer trends. Nestlé benefits from a multi-faceted competitive moat, built on its global scale combined with deep local expertise, allowing it to tailor products to regional tastes and consumer preferences. Its extensive brand portfolio includes household names such as Nescafé, Kit Kat, Maggi, Purina, Perrier, and Stouffer’s, fostering strong consumer loyalty. The company has an unmatched distribution network, with Nestlé products present in over 95% of households in most markets, making it difficult for competitors to challenge its reach. Nestlé invests significantly in research and development, driving innovation in health-conscious and sustainable products. The company’s short, integrated supply chains and close partnerships with farmers enhance efficiency, cost control, and ingredient quality, reinforcing its structural advantage. Beyond food and beverages, Nestlé’s 20,1% stake in L'Oréal provides diversification into the beauty and personal care sector, offering additional long-term value. With its scale, brand strength, and market penetration, Nestlé maintains a strong position in the industry. Its continued focus on innovation and premiumization, alongside its deep understanding of consumer needs, ensures its long-term leadership in the global food and beverage market.

Management

Laurent Freixe serves as the CEO of Nestlé, a position he assumed in 2024 after nearly four decades with the company. He joined Nestlé in 1986 and has held several leadership positions across different markets, including CEO of Nestlé Hungary, CEO of the Nestlé Iberian Region, and Head of the Nutrition Division at Nestlé France. Over the years, he has played a pivotal role in managing Nestlé’s largest regions, serving as Executive Vice President responsible for Zone Europe before becoming CEO of Zone Americas, the company’s most significant market. Following Nestlé’s new geographic structure in 2022, he was appointed Executive Vice President and CEO of Zone Latin America, where he focused on accelerating growth and operational efficiency. Throughout his tenure, Laurent Freixe has been recognized for his consistency in approach, strategic focus, and passion for Nestlé’s long-term success. His leadership style emphasizes speed in execution, clear prioritization, and aligning global strategy with local expertise. Colleagues describe him as an intense and passionate leader, deeply committed to Nestlé’s mission of delivering high-quality products to consumers worldwide. He has spoken about the importance of returning Nestlé to a winning trajectory and fostering a culture of accountability, ensuring that strategic investments translate into tangible growth. Laurent Freixe holds a degree from the Ecole des Hautes Etudes Commerciales du Nord in Lille and has participated in the IMD Program for Executive Development in Switzerland. Known as a popular figure at Nestlé’s headquarters, he has made it clear that his focus will be on strengthening the company’s core brands while accelerating organic growth rather than pursuing major acquisitions. While it is still early to assess his impact as CEO, his extensive experience across Nestlé’s key markets, combined with his strategic clarity and execution-oriented leadership, suggests that he is well-positioned to drive the company’s next phase of growth.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Nestlé has consistently achieved this, maintaining a ROIC above 10% over the past decade, which reflects the company’s strong operational efficiency and financial resilience. While there have been minor yearly fluctuations, ROIC has remained steady at around 13% each year, underscoring the stability of the business. Management has indicated a focus on improving profit margins, which could contribute to higher ROIC in the future. Even if ROIC remains at its current level, Nestlé’s ability to sustain this metric above 10% for an extended period is a testament to its strong competitive position and disciplined capital allocation.

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. At first glance, these numbers may seem discouraging, as equity has declined in most years. However, several factors have influenced Nestlé’s equity over time. One key factor is the company’s history of acquisitions and disposals, which impact its balance sheet. Another factor is Nestlé’s strategic use of debt to repurchase shares, a practice that can be beneficial in a low-interest-rate environment. Notably, 2024 marked one of the rare instances in the past decade where Nestlé’s equity increased year over year, making it only the third time this has occurred in ten years.

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 delivered positive free cash flow every year over the past decade. In 2024, free cash flow increased and reached its highest level since 2019, with the levered free cash flow margin also rising to its highest level since 2020. This increase was primarily due to improved working capital management, which meant faster sales, quicker customer payments, and some delayed supplier payments. Additionally, the company benefited from lower taxes and reduced restructuring costs, despite a higher level of capital expenditures than in most previous years. As Nestlé continues to grow its free cash flow, investors should benefit, as the company remains committed to increasing its dividend, a practice it has maintained for over 65 years. However, management has indicated that free cash flow and the levered free cash flow margin will decline in 2025 due to increased investment aimed at accelerating category growth and improving market share. While this will lead to a short-term decline, it should support long-term growth. The free cash flow yield is now at its highest level since 2016, suggesting that Nestlé shares are trading at a more attractive valuation than usual. However, we will revisit valuation later in the analysis.

Debt

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, determined by dividing total long-term debt by earnings. Upon analyzing Nestlé’s financials, I found that the company has 4,6 years of earnings in debt. While this is slightly above the ideal level, it is not a major concern given Nestlé’s scale and long-standing financial strength. The higher debt level is primarily due to Nestlé’s strategic use of inexpensive debt to fund share repurchases, while also using debt to support dividend payments. Management has acknowledged that debt is at the upper end of their target range and has stated that they do not plan to buy back shares in 2025. This focus on managing debt is reassuring, as it indicates a disciplined approach to capital allocation.

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Risks

Macroeconomic factors pose a significant risk to Nestlé as they directly influence consumer behavior, costs, and financial performance. One of the key challenges the company has faced is food price inflation, which reached its highest levels in decades during 2022, 2023, and 2024. While inflation itself is a concern, management has emphasized that the steepness and unpredictability of price increases have had an even greater impact on consumer behavior. When food prices rise rapidly, consumers often adjust their purchasing habits by opting for lower-cost alternatives, buying in smaller quantities, or cutting back on discretionary food purchases. This shift can put pressure on Nestlé’s sales volumes, particularly in price-sensitive categories. Another macroeconomic factor affecting Nestlé is the strength of the Swiss franc. Since Nestlé reports its financials in Swiss francs but generates most of its revenue from international markets, a stronger franc negatively impacts reported sales and earnings when foreign revenues are converted back into CHF. Over the past decade, this currency effect has resulted in an average annual sales decline of approximately 3,5%. If the Swiss franc remains strong, Nestlé will continue to face foreign exchange headwinds, making it more challenging to achieve meaningful top-line growth in reported terms. In addition to inflation and currency fluctuations, soft consumer demand has emerged as another headwind. While sentiment has stabilized, it remains fragile, and this was evident throughout 2024. In North America, growth has been disappointing, particularly among lower-income consumers, who have been disproportionately affected by inflation. Since food represents a larger portion of household budgets for lower-income consumers, they are more sensitive to price increases, which has led to weaker demand for Nestlé’s products.

Competition poses a significant risk to Nestlé as it operates in highly competitive markets across multiple categories. The company faces pressure from large multinational corporations with strong brand portfolios, as well as regional, local, and private label manufacturers. While Nestlé’s scale and brand strength provide an advantage, the competitive landscape remains intense, influencing pricing, market share, and consumer preferences. One of the most immediate challenges comes from private label brands, which have gained popularity due to their lower prices. During periods of economic uncertainty or recession, consumers often trade down from premium brands to more affordable alternatives. Management has observed this trend, with customers shifting towards private label products. This shift has impacted sales in several categories, particularly in frozen food, where price competition in the pizza segment led to negative growth. Similarly, in pet care and coffee creamers, competitive pricing dynamics forced Nestlé to make price adjustments, which affected revenue growth in the second half of the year. Beyond private labels, Nestlé competes with several global players across different product categories. In packaged food and beverages, companies like Kraft Heinz, General Mills, and Mondelez compete directly in segments such as frozen meals, chocolate, and snacks. Unilever and Danone present strong competition in dairy, nutrition, and plant-based products. In beverages, Nestlé’s coffee brands, including Nescafé and Nespresso, face competition from PepsiCo and The Coca-Cola Company, particularly in ready-to-drink and premium coffee segments. The bottled water market is another battleground, where Perrier and San Pellegrino compete with Coca-Cola’s Dasani and PepsiCo’s Aquafina. Consumer behavior also plays a role in Nestlé’s competitive challenges. There has been a growing preference for fresh, minimally processed foods, with more consumers opting to cook at home rather than purchasing prepared meals. This trend affects Nestlé’s sales in packaged and frozen food categories.

A potential decrease in demand for some of Nestlé's products presents a notable risk, particularly as consumer preferences shift toward health-conscious choices. The growing focus on weight management and overall wellness has already influenced purchasing behavior, and the increasing adoption of GLP-1 obesity drugs adds another layer of uncertainty. These medications, which have gained significant public attention for their effectiveness in promoting weight loss, are reshaping how consumers think about food and portion sizes. While Nestlé offers products that align with healthier lifestyles, this shift could negatively impact demand in certain categories, particularly powdered and liquid beverages, milk and ice cream, and confectionery. Consumer preferences are constantly evolving due to demographic changes, lifestyle shifts, and a heightened emphasis on nutrition. More consumers are actively reducing their intake of high-calorie, high-sugar products in favor of healthier alternatives. While this trend was already underway before the rise of GLP-1 drugs, widespread adoption of these medications could accelerate the decline in demand for indulgent snacks and sweets. These drugs not only suppress appetite but also encourage consumers to eat smaller portions and make more mindful dietary choices, which could have long-term implications for Nestlé’s product portfolio. If the adoption of GLP-1 medications continues to rise, Nestlé may need to further adapt its portfolio to align with changing consumer habits. Some of its product lines, such as plant-based options, functional nutrition, and health-focused beverages, could benefit from this shift, while other categories may experience a structural decline in demand. The extent of this impact remains uncertain, but it is likely that certain product lines will face headwinds as consumer behavior continues to evolve.

Reasons to invest

Focusing on Nestlé’s core portfolio is a compelling reason to invest in the company, as it positions Nestlé to drive sustained growth by capitalizing on its strongest brands, expanding into new markets, and leveraging its category leadership. Management has emphasized that Nestlé’s existing portfolio provides exposure to category growth of 3% to 4%, but by concentrating resources on its best-performing brands and categories, the company aims to accelerate growth further. The strategy centers on expanding its "winners" through geographic expansion, product innovation, and premiumization, ensuring that its strongest brands reach their full potential. A prime example of this approach is Nestlé’s coffee business, where the company is already the global leader with three of the top brands—Nescafé, Nespresso, and Starbucks. Despite its strong position, significant opportunities remain in areas such as ready-to-drink coffee, out-of-home consumption, and cold coffee, all of which are generating billions in sales with strong double-digit growth. By increasing its investments in these segments, Nestlé expects to extend its leadership and drive further growth. Pet care, Nestlé’s second-largest category, is another core driver with substantial expansion potential. The company sees significant opportunities in underpenetrated markets, particularly in Asia, Oceania, and Africa, where pet ownership is increasing. Additionally, Nestlé is heavily investing in high-margin areas such as pet treats and therapeutic pet nutrition, which benefit from long-term trends like pet humanization and premiumization. Even in its mature brands, Nestlé continues to drive growth through product innovation, as seen with KitKat. Despite being nearly 90 years old, KitKat remains one of Nestlé’s fastest-growing brands, with management identifying substantial expansion opportunities.

Product innovation is a key reason to invest in Nestlé, as it drives growth by keeping the company competitive, capturing new market opportunities, and adapting to evolving consumer preferences. Nestlé has adopted a more disciplined and strategic approach to innovation, focusing on fewer, bigger, and better product launches. Rather than spreading resources across numerous small initiatives, the company is concentrating its efforts on a select number of high-impact innovations, ensuring they receive the necessary investment, execution, and scalability to succeed. This refined approach allows Nestlé to maximize the potential of its six major innovation "big bets," which are carefully selected based on consumer trends and category growth potential. By prioritizing these high-impact innovations, Nestlé ensures that each new product or category expansion has the resources to scale effectively across multiple markets. This method reduces the risk of underperforming innovations while increasing the likelihood of creating substantial new revenue streams. The company expects half of its future growth over the next few years to come from impactful innovations and renovations. This underscores the central role of innovation in Nestlé’s long-term strategy. By streamlining its approach and launching new products with greater speed and efficiency, Nestlé strengthens its ability to consistently introduce successful offerings to the market.

Health and wellness is a compelling reason to invest in Nestlé, as the company is well-positioned to capitalize on long-term demographic and consumer trends. With an aging global population and growing awareness of nutrition’s role in longevity and disease prevention, Nestlé sees significant opportunities for expansion in this space. The company has identified four key themes related to aging - maintaining a healthy weight, preserving lean muscle mass, ensuring adequate micronutrient intake, and preventing sugar spikes - all of which align with its product innovation strategy. Nestlé has long been a leader in nutrition science, with protein playing a central role in many of its health-focused growth areas, including weight management, malnutrition treatment, and muscle recovery. The company’s expertise in structuring proteins allows it to develop high-concentration solutions tailored to specific health needs. Nestlé Health Science already generates CHF 2 billion in annual sales from protein-focused products, growing at a high single-digit rate, with strong future demand expected. Beyond protein, Nestlé is addressing health and wellness needs across all life stages. Its proprietary Synergy blend, which combines probiotics with human milk oligosaccharides, supports infant development and has already been launched in 15 markets. The company is also relaunching its Materna range to better meet the nutritional needs of pregnant women. Additionally, Nestlé is developing targeted nutrition solutions for GLP-1 users and weight-conscious consumers through brands like Boost and Vital Pursuit, ensuring it remains at the forefront of evolving dietary needs. Affordable nutrition is another major focus, particularly in emerging markets where access to high-quality, nutrient-dense foods remains limited. Nestlé’s ability to deliver science-backed, cost-effective nutrition solutions positions it well to serve this growing demand while expanding its market presence in Asia, Oceania, Africa, and Latin America.

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Valuation

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 for free.

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 4,19, which is from 2024. 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 35,78. 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 17,89 (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 16.675, and capital expenditures were 5.638. 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 3.947 in our calculations. The tax provision was 3.314. We have 2.571 outstanding shares. Hence, the calculation will be as follows: (16.675 – 3.947 + 3.314) / 2.571 x 10 = CHF 62,40 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 4,29 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is CHF 49,28.

Conclusion

I believe Nestlé is an intriguing company with strong management. Its moat is built on its global scale, extensive brand portfolio, and unmatched distribution network. The company has consistently achieved a ROIC above 10% for the past decade and delivered its highest free cash flow since 2019 in 2024. Macroeconomic factors pose a risk to Nestlé, as food price inflation, currency fluctuations, and weak consumer demand can negatively impact sales and profitability. High inflation has led consumers to trade down to cheaper alternatives, while the strong Swiss franc continues to create foreign exchange headwinds. Competition is another challenge, with pressure from multinational corporations, regional brands, and private label manufacturers across multiple categories. This has impacted sales in key segments and continues to challenge Nestlé’s pricing power and market share. A potential decrease in demand for some of Nestlé’s products is also a risk, as shifting consumer preferences toward health-conscious choices, including weight management and the adoption of GLP-1 obesity drugs, could negatively affect sales in categories like powdered and liquid beverages, milk and ice cream, and confectionery. Despite these risks, Nestlé's focus on its core portfolio is a key reason to invest, as it allows the company to drive sustained growth by leveraging its strongest brands, expanding into new markets, and investing in high-growth categories. Product innovation is another advantage, with Nestlé concentrating on high-impact innovations that enhance competitiveness and capture new market opportunities. By prioritizing select "big bets" and streamlining execution, the company aims to scale successful products efficiently. Health and wellness further strengthen the investment case, as Nestlé is well-positioned to benefit from long-term demographic trends, including an aging population and increasing consumer focus on nutrition and disease prevention. I believe Nestlé is a great company, and buying shares at the Ten Cap price of CHF 63 would be a solid long-term investment.

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