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Coverage Initiation: Nestle S.A.
Value Line recently initiated coverage of Nestle S.A. (NSRGY), one of the world’s largest nutrition, health, and wellness companies, with operations in almost every country in the world. It is based in Switzerland and employs approximately 280,000 individuals. However, like most other corporations, Nestle came from humble beginnings.
The company can trace its roots back to the 1860s, when Henri Nestle, a pharmacist by trade, began experimenting with cow’s milk, wheat flour, and sugar. His goal was to create a healthy and inexpensive alternative for mothers who were unable to breastfeed their infants. At the time, mothers that were incapable of breastfeeding often lost their children due to malnutrition. Nestle’s first product was named Farine Lactee Henri Nestle.
Farine Lactee (Cornflour Gruel in English) was initially used on a premature baby who could not digest his mother’s milk or similar products that were available at the time. Local physicians were out of ideas and the baby’s future appeared grim. Thankfully, Nestle’s formula worked and the baby’s life was saved. Soon after this success, Farine Lactee was being marketed throughout Europe. In 1905, the Nestle Company merged with the Anglo-Swiss Condensed Milk Company and soon after, added chocolate to its product line. The newly formed entity had production facilities throughout Europe, the United States, and quickly expanded into Australia and Southeast Asia.
The World Wars
The Nestle Company struggled mightily during the global conflicts, since raw materials were hard to come by and distribution channels were interrupted. Milk was a main ingredient in a number of the company’s products, but due to government mandates, milk was distributed to the public and not available for most production purposes. The company’s debt load ballooned and annual revenue and bottom-line results varied wildly from year to year. On the bright side, in the 1930s, Nestle developed Nescafe and Nestea. Both products were big hits, and helped the company rebound after World War II ended.
Throughout the post-war years, Nestle bolstered its product portfolio through a number of meaningful acquisitions. It merged with Alimentana S.A., a manufacturer of soups and seasonings, and acquired Crosse & Blackwell (produced sauces and spreads), Findus Frozen Foods, Libby’s Fruit Juices, and Stouffer’s Frozen Foods. In addition, due to the new technology of freeze-drying, Nestle created a new type of instant coffee, Taster’s Choice.
Over the past couple of decades, Nestle continued to aggressively seek acquisitions, which added materially to its product offerings and market reach. San Pellegrino, Ralston Purina, and Carnation are three noteworthy purchases since 1990. Nestle’s current product roster is quite impressive, with dozens of established and profitable brands in a variety of consumer categories. Kit Kat, Butterfinger, and Smarties headline the company’s confectionary offerings, while Gerber possesses a material market share in the baby food sector. It owns a number of frozen food brands, including Hot Pockets and Lean Cuisine. Along with San Pellegrino, its bottled water stable includes Perrier and Poland Spring. Nestle also owns Alpo, Fancy Feast, Friskies, Purina, and several other well-known pet-related brands.
Although many of its products are industry leaders, stiff competition exists. Thus, in order to remain relevant, Nestle invests heavily in research and development. In 2011, the company spent more than $1.5 billion on R&D. Going forward, it is vital that these expenditures bear fruit, and help Nestle improve its existing product portfolio, as well as lead to the introduction of new offerings.
As mentioned, the company’s operations span the globe and, thus, have material exposure to pricing fluctuations and currency risk. In addition, political unrest, economic weakness, and armed conflicts pose a threat to Nestle’s profit potential. For example, due mainly to hefty debt loads, the euro zone has been dealing with a number of financial ills. Although Nestle sells consumer staples, reduced spending throughout Europe has hampered the company’s performance of late. In addition, the euro has fluctuated wildly compared to the U.S. dollar and other currencies.
Nestle stock primarily trades on the SIX Swiss Exchange under the ticker NESN.VX. Since 1989, its American Depository Receipts (ADRs) have traded on the Over-The-Counter Market (Ticker: NSRGY.PK). One ADR is equal to one share of Nestle common stock.
Income-oriented investors should note that while Nestle has been returning a good deal of its profits to shareholders via dividend payments, it is a foreign company. As such, the dividends may be subject to withholding taxes. Moreover, dividend policies are generally different in Europe—the company distributes its payout only once a year in mid-April, which adds an element of risk. Furthermore, overall, there is less of a stigma attached to dividend cuts in Europe.
For a detailed evaluation of Nestle’s current business prospects and the equity’s investment merits, subscribers are advised to monitor our regular quarterly coverage in The Value Line Investment Survey, while keeping an eye out for Supplementary Reports when breaking news takes place.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.