Drip Portfolio Report
Tuesday, December 2, 1997
by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Dec. 2, 1997) -- Today we'll take a gander at the largest food company in the world. Oddly, though, the Swiss company Nestle SA (OTC: NSRGY) is listed on the OTC bulletin board and not on any major U.S. exchange. The stock trades as an American Depository Receipt (ADR). More significantly, the company's DRP plan does have fees. Though we won't let fees stop us from looking at a business and investing in it if it's the best of the group, it's something that we'll keep in mind. Nestle charges five cents per share for cash investments and dividend reinvestments, and its transfer agent is Morgan Guaranty Trust.

The Food and Coffee King:
Nestle (OTC: NSRGY)

Description: You probably didn't know this (unless you just read the title above), but Nestle is the leading coffee seller in the world, and sells the number one coffee, Nescafe. The World Food Company, as it calls itself, also sells nearly 8,999 other products, which we could list below... but we won't. Headquartered in Switzerland, Nestle is a conglomerate food, drink, and pharmaceutical company, and it has been steadily growing for 130 years. Nestle is the twenty-fifth largest manufacturing company in the world. (A personal interest note: Chevron (NYSE: CHV) and DuPont (NYSE: DD) list right before Nestle in manufacturing size, while General Motors (NYSE: GM) is number one.)

Major brands: Nestle sells Stouffer's, Nescafe, Taster's Choice, Coffee-Mate, Carnation, Nestea, Hills Brothers, Libby, Coca-Cola (kidding), and Ortega. Also Alpo, Friskies, Mighty Dog. And Baby Ruth, Kit Kat, Butterfinger. And finally, Opti-Free contact lenses.

Core Moneymaker: Of $45 billion in fiscal '96 sales, Nestle sold $12 billion in milk and ice cream products, $12 billion in beverages, another $12 billion in prepared dishes, and nearly $7 billion in chocolate and candies. The remaining $1.8 billion of sales were in pharmaceuticals.

Valuation and Growth: Because the company is Switzerland-based, getting information about it in dollars isn't easy. In fact, the only place that I found complete financial information on the company (though mostly in Swiss francs, of course) was at the company website (http://www.nestle.com).

For the first six months of the year sales rose 18% to $33 billion Swiss francs, while the operating margin improved to 9.3% from 8.6%. Net profits increased substantially, to 5.6% from 4.7% last year. But look again: sales in U.S. dollars increased only 2.9%, from $22.5 billion to $23.2 billion. The difference is in the currency. Most currencies rose in value over the past year compared to the Swiss franc.

The $74 stock trades at 23 times trailing earnings, 20.7 times '97 earnings estimates, and 19.1 times '98 estimates. The company is expected to grow about 11% each year, and does expect a sales increase of 15% this year (in Swiss francs).

Margins Reviewed: We already mentioned that operating margins were recently above 9% and net profit margins were above 5%. These are considerably below the other companies that we looked at (General Mills had 15% operating margins, Campbell Soup and Busch 18%, Coca-Cola 27%). We're most interested in companies with net profit margins above 10%. 5% is great for a company of such immense stature as Nestle... but... Coca-Cola is 44% the size of Nestle and manages net margins above 20%. Ba-Boom! Nestle operates nearly 480 factories around the world, certainly weighing on margins.

Capital allocation: The stock yields a 1.2% dividend, so management does share some profit. The company spends a majority of cash flow on acquisitions, though, as Nestle is growing primarily by acquiring other companies.

The Snapshot for the Nestle Quik Rabbit:

Ticker: NSRGY
Recent Price: $74.50

1996 sales: $45 billion
1996 oper. earnings: $3.6 billion
Recent operating Margins: 9.4%
Net Margins: 5%

Fiscal '97 EPS estimates: $3.57
Fiscal '98 EPS estimates: $3.86

Current P/E: 23
P/E on 1997 EPS: 20.7
P/E on 1998 EPS: 19.1
Long-term expected growth rate: 11%
Yield: 1.20%

Conclusion: This column lacks some data that we usually look at due to Nestle's Swiss status. Because getting complete information that would be easy to analyze would be an ongoing challenge, it's difficult to consider Nestle seriously when we have great companies in our own back yard to consider -- companies that are growing at similar rates and with better margins, and offering free DRP programs.

Nestle has many leading brand names and is a well-run industry leader, but we like to know exactly what we're buying. Accurately reading the balance sheet of Nestle would take the learning of some Swiss-specific accounting, or at least several new terms. As Foolishness is about keeping investing familiar, easy, and fun, the extra work involved sways us from considering it further. If Nestle were growing 18% annually, crushing the market's rate of growth and sporting double-digit margins across the board, we'd have to consider it even if the company reported numbers in a tribal language. But Nestle is only growing at a respectable pace and is valued at a premium to that pace (as are all the large food companies). We can find such value right here in this country, which will keep us from flying to Switzerland to look for it.

See you tomorrow, when we have our first-ever guest columnist pitching in. In the meantime, hopefully I'll see you on the Fool's new Web message boards or on AOL's boards.

Fool on!


Correction: Yesterday, when digging back to memories of childhood education to mention the Roman calendar, I stated in relation to December being the tenth month that the calendar was once ten months long. December was the tenth month at one point (and hence the now inappropriate December name), but there were, of course, two other months following it. A Foolish reader wrote the interesting email that follows:

"December *was* the tenth month, but there were 11th and 12th months, too (I've forgotten their names). Here's the story in a nutshell:

"Julius Caesar, egomaniac that he was, decide to name not a holiday or even a three-day-weekend after himself, but an entire month. He picked the popular summer month now known as July. Augustus Caesar followed suit, resulting in the modern name August for the 8th month. These two pushed back the formerly-appropriately-named September, October, November and December to become the 9th, 10th, 11th and 12th months, respectively.

"An interesting twist: Both the 7th and 8th months had formerly had 30 days each. Julius Caesar didn't want "his" month to be shorter than any of the others, so he stole a day from somewhere (somewhen?) he figured nobody would miss it: the cold winter month of February. Augustus did the same, leaving February with only 28 days. (Leap years were invented centuries later.)"

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Stock   Close    Change
INTC  $78 1/16  -3 7/16
JNJ   $64 3/8     -5/16
              Day      Month   Year    History
Drip        (1.98%)    0.44%  (10.24%)  (10.24%)
S&P 500     (0.32%)    1.71%   31.18%     2.14% 
Nasdaq      (1.49%)    0.36%   24.43%     0.79%     

Last Rec'd   Total #   Security   In At   Current
11/03/97      4.835       INTC   $81.623   $78.063
11/14/97      1.000       JNJ    $62.125   $64.500

Last Rec'd  Total#  Security  In At    Value   Change
11/03/97    4.835    INTC     $394.69  $377.47  ($17.22)
11/14/97    1.000    JNJ       $62.13   $64.50    $2.38    

Base:   $900.00
Cash:   $389.75**
Total:  $831.72

GOAL: The portfolio began with $500 on July 28, 1997, 
adds $100 on the 15th of every month, and the goal 
is to grow the port to $150,000 by August of the year 2017. 

**Transactions in progress:
11/24/97: $100 sent to purchase more Intel.

The Drip Portfolio has been divided into 
37.063 shares with an average purchase
price of $24.283 per share.