Halls of Shrewd'm / US Policy❤
No. of Recommendations: 2
Hi Jim.
Re your Nestle comments. One I've been looking at. Price looks attractive on the surface however revenue is roughly the same as a decade ago as is EPS, some share buybacks however debt levels / liabilities increasing year on year. Screams stagnation to me?
No. of Recommendations: 9
Re your Nestle comments. One I've been looking at. Price looks attractive on the surface however revenue is roughly the same as a decade ago as is EPS, some share buybacks however debt levels / liabilities increasing year on year. Screams stagnation to me?
It's a valid point, they are far from being a growth business. The top line isn't growing much, and hasn't in ages. There is no obvious reason to think it will suddenly start to take off. Their products do not do well outside they US, where their penetration has topped out. It's a good part of the way to being a cash cow, in some ways.
But you can still do pretty well with a semi cash cow. Top line sales are up 4.7%/year in the last 10 years, their main sign of stagnation. Net profit margins have risen, so that sales growth became net income growth of 8.3%/year. With share count reductions, that turned into EPS growth of about 9.4%/year, definitely getting to be an interesting number. So the main thing here is to figure out why that has happened, and to what extent it can continue.
Perhaps its biggest charm is that it is a pretty bullet proof business. Their operating margins are holding up well in the 22-26% range, and I expect that to continue, give or take. There has been a small up trend in that figure which may unwind a bit with cost pressures, but I don't see a sign of structural deterioration. They are built to last.
The biggest problem is that the EPS growth over the last decade has come in part from one-time things. Most notably, the net profit margin is up quite a bit--not something you can extrapolate. Part of that is because they were (like Berkshire) very big beneficiaries of the tax cuts. I would say around 2.1%/year of the last decade's increase in net income was from that alone. (in the five years to 2017 the average tax rate was about 32.0%, last 6 years average about 16.4%, meaning each dollar of pre-tax earnings is worth 23% more than it used to be. Spread over the decade I'm talking about, that's an increase of 2.1%/year of the 4.7%/year total net income growth figure)
Still, not a bad record. More "unexciting" than "dead end".
A good part of the investment thesis is the mere quality of the franchise, and the fact that the market generally appreciates it. Like Coke, but more deserved. As a result, I think there is a good chance that valuation multiples may return to their historically pretty generous range (average around 22.5 times trend earnings), giving a nice one time boost in addition to the moderate value growth trend. I hope they are pouring zillions into buybacks today.
If you look at the actual rolling year pre-tax earnings versus its trend, they have had a notable upswing in the last 6-or-so quarters. Frankly I'm not entirely clear on which moving parts are the underlying reasons, I'll have to do more reading on that. That sort of blip needs a bit of an explanation because you need to know if it's just a cyclical upswing (in which case mean reversion of multiples might get you a 15% bounce if/when it happend) or a new level of the longer term trend (in which case valuation mean reversion might get you 28-35%).
Jim
No. of Recommendations: 6
Their products do not do well outside they US, where their penetration has topped out.
I am baffled by that comment. After having from time to time emailed with Jim about both of us wanting to own Nestlé but always finding it too expensive yesterday I finally bought my first ever Nestlé shares, something I was waiting for 2 decades, and intend to accumulate more.
I am baffled because I am travelling a lot and no matter whether I am in any European country, in a Southeasian one, or as at the moment in Aussie/New Zealand, there is no supermarket where Nestlé does not dominate the shelves with snacks, water or pet food. I always was baffled why French, Portugiese, Singaporeans or whatever nationalities peoples pay a premium for a simple bottle of water the fine print says "Nestlé", but they do --- while with pet and many other foods they actually have choice than to buy something with that label on it. As a friend told me in Switzerland they have a saying "Von der Wiege bis zum Kästle, Nestlé" (From birth to grave, Nestlé) --- which is true for most or all of the world.
Nestlé is a global dominating food giant. This for me is a company with a huge moat. It always was, it still is, and I can't see that this will ever change during my lifetime. It's not a growth company, yes, but because of it's worldwide penetration, unavoidability and resulting moat for me it's the only company I put with respect to durability on the same level as Berkshire.
No. of Recommendations: 0
Their products do not do well outside they US, where their penetration has topped out.
I probably misunderstood Jim's sentence. I understood it as penetration having topped out in the US while he probably means "topped out outside the US", which is exactly what I wrote - - - still I am baffled by the "do not do well outside the US". Growth wise, maybe, but therefore you get moat and unavoidability "forever".
No. of Recommendations: 1
Their products do not do well outside they US, where their penetration has topped out.
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I probably misunderstood Jim's sentence. I understood it as penetration having topped out in the US while he probably means "topped out outside the US", which is exactly what I wrote - - - still I am baffled by the "do not do well outside the US". Growth wise, maybe, but therefore you get moat and unavoidability "forever".
You probably misunderstood it because there is a mistake somewhere in the sentence. It is pretty unusual for Jim to make any grammatical errors, probably because he proofreads and edits much better than I do. But in this case, I think he may mean something completely different from what you have understood, and I suspect it is because a whole phrase disappeared accidently in the editing. Fortunately, no exigisis is necessary, we can just ask the scribe to see what he meant!
DTB
No. of Recommendations: 10
Their products do not do well outside they US, where their penetration has topped out.
...
I am baffled by that comment.
I'm humbled by the notion that people even tried to find a reason that my comments might make sense. They didn't.
It's easy: I got it mixed up with another thread and was talking about Hershey.
Both discussed here recently, chocolate makers, both names two syllable trochees that rhyme...you can see the problem : )
Sorry!
Jim
No. of Recommendations: 4
It's easy: I got it mixed up with another thread and was talking about Hershey.
Both discussed here recently, chocolate makers, both names two syllable trochees that rhyme...you can see the problem : )
I can see other sources of confusion, too: Both with highish valuations (although not as high as they have sometimes been), and for both of them, stagnant revenues, little opportunity for expansion, highish margins already and with moats that don't seem (in my view) particularly strong.
I suspected that you had mispoke because it is hard to understand how Nestle could be characterized as not doing well outside the US; they have always done better in Europe than in America. But I guess this illustrates that both are somewhat geographically confined.
I have to consider whether my own distaste for the products of both companies is not biasing my estimation of their investment prospects, always a danger. But if you have a choice between buying, say, Hershey's at 21 peak earnings on stagnant revenues, vs say Carmax at 25 times depressed earnings on steadily increasing revenues, seems like an easy call for KMX. I guess I just don't put enough faith in the idea that Hershey's (or Nestle's) multiples will necessarily revert to their historically higher levels.
No. of Recommendations: 0
If we're comparing Nestle to HSY is say that purely on metrics HSY is the far better investment opportunity having nearly tripled EPS from 2013 to 2023.
