Consumer-goods investors like Nestle (NSRGY -0.76%), as its shares have risen since the market bottom in 2009. However, Nestle is not cheaply priced with its forward price-earnings ratio of 17.6. Should investors consider Nestle a decent investment opportunity now? Let's take a closer look.
Global leading positions and growing performance
Nestle possesses a truly global brand portfolio with diverse product categories that include powdered & liquid beverages, milk products & ice cream, prepared dishes and cooking aids, confectionery, and pet care. It operates in more than 70 countries. Over the last nine months, Nestle has posted good growth in all of those categories and across all geographical regions, with total sales up 4% to CHF 68.4 (US $76.6) billion and organic sales growth of 4.4%. The organic sales growth was driven by a 3% rise in real internal growth and a 1.4% increase in pricing. For the full year, Nestle expects to deliver 5% organic growth through margin improvement and underlying EPS growth in constant currency.
Although emerging market growth has slowed down, the emerging markets are still big contributors to Nestle's growth. Over the last nine months, Nestle's sales in emerging markets rose by 8.8%, lifted by 5.6% organic growth in its Asia, Oceania, and Africa region. The company sees emerging markets as a potential growth driver, and it will keep focusing on underdeveloped markets.
A cash cow committed to returning cash to shareholders
What might attract long-term consumer goods investors is the fact that Nestle has generated more cash than it needs to run its business, thus, it has produced tremendous free cash flow. Over the past ten years, Nestle has been a cash cow that has generated high free cash flow. Over the past twelve months, its free cash flow was more than CHF 13.9 (US $15.6) billion. Nestle has returned its excess cash to its shareholders by paying a good dividend and repurchasing its shares. Over the past four years, the company has reduced its share count by more than 10%. At the current trading price, its dividend yield is 2%.
Only a small premium to its global-food peers
Nestle seems to have an expensive valuation. However, Nestle also has a 30% stake in L'Oreal, which is worth more than $30 billion. Excluding the L'Oreal stake, Nestle trades at only a small premium versus the forward earnings valuations of General Mills (GIS 0.85%) and Kellogg (K 0.84%) of 16.4 and 15.3, respectively.
General Mills and Kellogg do not have as much international exposure as Nestle does, but they are increasing their international presences. General Mills generates more than $6 billion in international sales, including joint ventures, and more than $2 billion of these sales come from emerging markets. China, the biggest consumer market in the world, has delivered double-digit growth for General Mills over the past five years. General Mills said that China was on track to deliver double-digit growth again in fiscal 2014.
Kellogg has also focused on emerging markets to drive its growth and profitability. In the third quarter, Kellogg reported 6.7% internal net sales growth in its Latin American business and 2.9% internal net sales growth in the Asia-Pacific region, driven by double-digit growth in India, Southeast Asia, and its Pringles business. Kellogg has created a global efficiency program to drive growth, concentrating on three main actions: optimizing supply chain infrastructure, consolidating common processes and business services across multiple regions and functions, and initiating a new global focus on categories. By 2018, Kellogg expects to produce annual run-rate savings of $425-$475 million.
My Foolish take
General Mills and Kellogg seem to be good stocks for income investors with their decent dividend yields of 3% and 2.90%, respectively. However, Nestle remains the favorite despite its valuation premium because of its global market leading positions in nearly all of its brand categories, its strong growing presence in emerging markets, and its decent full-year estimated growth.
