Make Nestle Part Of Your Portfolio

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nestle (NASDAQOTH: NSRGY) has been for a while the favorite Consumer Goods Company (CGC) of many great investors such as the successful value driven hedge fund Gardner Russo & Gardner. As a matter of fact, every time I have been into a Columbia Investment Management Association meeting (and I went to every single one since 2010), Mr. Russo explains why almost every equity investor should own Nestle shares. His reasons are many: Nestle has great brands (from Nespresso to Gerber baby foods) which are correctly managed, a global footprint and wise financial management. Even if the company might seem expensive trading at 2013 11x EV/EBITDA and 17.7x P/E it is not really expensive at all. Nestle grew its top line by 10% in 2012 (and expects to grow it again by 7% in 2013) and NSRGY's financial strength and pricing power are unparalleled given the huge range of the products the company offers. 

When comparing Nestle to other European CGCs the picture is even more clear. Nestle is the way to go. Companies such as the French champion Danone (NASDAQOTH: DANOY) or Anglo Dutch Unilever (NYSE: UN)trade roughly at the same valuation level but Nestle, even after acquiring Wyeth for $11.9 billion, uses much lower leverage (NSRGY net debt to equity is 36% versus DANOY's 64% and UN's 56%). Besides, Nestle grows faster and has a much more wider global reach than its European peers.

When we talk about CGCs its impossible to avoid the subject of market share since market share is tightly related to operating margins. The reason is simple, the consumer goods business is a distribution business. And higher market share means that you can distribute your fixed costs across a higher product volume. The case of Nestle is very particular since the company owns a collection of great names that own dominant shares of their respective markets across the developed and emerging world (for example Nestle Waters in Europe or Nescafe in Latin America). This makes Nestle a stable cash flow machine that is growing hand in hand with the emerging middle class in countries such as Brazil, China and India. Moreover, the company is careful managing its cost structure. EBITDA margins are expected to reach 18.7% by 2013 while Danone and Unilever are expected to have EBITDA margins of 16.5% and 16.2% respectively. Nestle's EBITDA may seem low compared to the 39% EBITDA margin posted by beer (and financial) champion AB InBev (NYSE: BUD) but Nestle has a much wider product portfolio (from chocolates to mineral waters) so they are not comparable companies. Even so, its relevant to stress that Nestle's business line diversification makes it less vulnerable to government regulations which makes Nestle an even better investment proposition than BUD.  

Clearly, from what I wrote above, I think there is a case to own Nestle stock. Even if the M&A window is closed for Nestle since its just too big to be acquired by a competitor (Nestle's market capitalization stands at $224 billion), its growing dividend is a great way to benefit from the business. NSRGY pays an always growing 3.3% cash dividend yield (both UN and DANOY pay a lower cash yield).

My recommendation is simple, if you are a real investor Nestle is a good equity long idea. I can not think of many companies that can combine such a global reach, great management and incredible brands. I could bet that Nestle will never hurt any long term portfolio.


Fool blogger Federico Zaldua does not own shares in any of the companies mentioned in this entry.

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