Thursday, 19 February 2015

Nestle - solid results but patience required

It has been six months or so since I last wrote on the Swiss food behemoth Nestle and since then the shares are up a little...and the Swiss franc famously had a sharp rise too in January (although even against the euro around half of this has been given back) which impacted the share.  Still the broad rule of thumb of waiting for c. CHF64/66 to buy the shares has proved broadly correct over the last year.

The company described the results as 'resilient' and I think broadly that is correct.  They have seen stronger organic growth levels than the 4.5% achieved but from the perspective of today's world this was an ok performance (even if currency did have an impact as shown by the constant currency versus reported lines)...

...and all divisions except confectionery saw higher margins.  Nestle's own measure of real internal growth (RIG) was more mixed however with three divisions seeing negative progression here although it is notable how well water, nutrition and PetCare did (the former two potentially a read across for Danone who report tomorrow).  

And where geographically was this growth coming from?  Unsurprisingly disproportionately the emerging markets:

Cash flow was also reasonable with net debt pushing down a little (and still way below x1 ebitda which is why, as reported recently, the company could issue corporate debt at near zero rates).  Underlying free cash flow was around CHF8bn or just over a 3.5% free cash flow yield (of which 3% is paid out as a dividend).  Solid if not spectacular.

Of course the above allows continued progressiveness in the dividend payment:

So pulling it all together trading at over x17 EV/ebit FY14A the company is not cheap even adjusting for potential growth and giving the company a 'Swiss premium'.  Below CHF70 you could make a 'hold' case and back below the aforementioned CHF66 level a 'buy' one.  Patience I think for this high quality but statically expensive company.  

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