Gene Marcial's Stock Picks

Marcial: Why Pros Are Sweet on Nestle


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Nestle—52-week ADR price

When shares of global packaged-food goliath NestlÉ (NSRGY) toppled to a 52-week low in early March, some institutional portfolio managers seized the opportunity to add to their holdings in the stock. NestlÉ got hammered partly because of the worldwide recession and consumer spending slowdown. But Edwin Walczak of Swiss-based asset manager Vontobel increased the firm's stake in NestlÉ from 4% of its portfolio to more than 6%.

"The concerns about the stock—including fears that its stalwart performance last year already exhausted its upside potential, and a slowdown in sales in emerging markets—don't exceed the positive virtues and valuation of NestlÉ's quality business," says Walczak. "NestlÉ isn't just the world's largest, but the best food company [on] the planet," adds the analyst, who believes the stock is trading at bargain-level prices based on its price-earnings ratio, potential for growth, and attractive dividend yield of nearly 4%.

L'Oreal Stake on the Block?

Headquartered in Vevey, Switzerland, and trading in the U.S. through American Depositary Receipts, NestlÉ is known worldwide for its broad range of 8,500 food products, including its famous chocolate bars Baby Ruth and Butterfinger, NestlÉ Quik, NescafÉ coffee, Carnation milk, Coffee-mate creamer, Stouffer's frozen dinners, Perrier mineral water, and Alpo dog food. The company's ADRs reached a 52-week low of 29 on Mar. 3, down from a 52-week high of 50 last June. On Apr. 28 they closed at 31.90.

NestlÉ also owns assets in nonfood businesses: It has held big stakes in two companies, New York Stock Exchange-listed Alcon (ACL), a Swiss-based eye-care company, and French cosmetics leader L'Oreal (LRLCY), which trades over the counter in the U.S. NestlÉ has agreed to sell its 51.7% Alcon stake to Swiss pharmaceutical company Novartis (NVS), which has already paid NestlÉ for half of the stake.

NestlÉ's interest in L'Oreal, valued at about $15 billion, also is believed to be on the block, but no bidder has yet surfaced, notes Daniel Grüneisen, CEO of Vontobel Securities. He figures that NestlÉ ADRs are selling "at historic lows" and are an attractive investment for the next three to five years. They deserve to trade at much higher price-earnings ratios, he says. When stripped of both Alcon and L'Oreal, NestlÉ would trade at 9 times its projected 2009 earnings of $2.72 a share, figures Grüneisen. That kind of valuation is below its historic p-e average as well as those of its peers, he notes. Major food company Kraft (KFT) trades at 13 times, and European food stocks trade at around 11 times, says Grüneisen. In fact, NestlÉ deserves to trade at a premium to its peers, he suggests.

Industry-Leading Growth Ahead?

"NestlÉ's top-of-class ranking warrants a sizable premium to its peers," says analyst Andrew Wood of Sanford C. Bernstein, who rates the stock outperform with a price target of 43 a share. He describes NestlÉ as the "strongest and most balanced company in the European food group." He adds: "We have seen excellent operating results from NestlÉ in 2006, 2007, and 2008, and we expect this to continue in 2009…despite the tough environment."

NestlÉ reported first-quarter results on Apr. 22, which Wood says "were good, but not great." Nonetheless, the earnings showed that "NestlÉ remains well positioned to deliver strong top-line [revenue] in 2009, plus healthy margin development, given easing commodity costs." He says that NestlÉ remains his top pick in the European food sector for 2009.

Morgan Stanley's (MS) European consumer team also has praise for NestlÉ: "The breadth of NestlÉ's growth geographically continues to stand out within the European food group, and we view it as the most defensive stock operationally. We expect NestlÉ to achieve industry-leading organic growth of close to 5% this year."

In the U.S., NestlÉ ADRs are owned by some large institutional investors, among them Harris Associates, which owns 10.3 million, and State Farm Mutual, with 9.3 million.

Among analysts, only two in the U.S. follow NestlÉ and both rate the ADRs outperform. One of them, Jefferies' (JEF) Simon Marshall-Lockyer, put this headline on his recent report about the company: "NestlÉ: Solid as a Rock."

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

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