Nestle (NESN:VTX) Analysis

No need to introduce this Swiss multinational with 303,000 employees, present in 189 countries, with more than 2,000 brands, and active in the food sector since 1866.

Valuation & dividend

Autant le dire tout de suite : Nestle est actuellement totalement hors de prix. En effet, le titre se négocie à :

• 38.55 times current recurring earnings
• 25.31 times average recurring earnings
• 23.14 times tangible assets
• 4.02 times assets
• 2.73 times sales
• 27.92 times current free cash flow
• 24.71 times the average free cash flow

The EBITDA only amounts to 3,78% of the enterprise value, which confirms the stratospheric valuation of the title.

If Nestlé is not worth buying for its profits, assets, sales or free cash flow, let's see what it is like in relation to the dividend. This does indeed seem surprisingly attractive, with a yield of 2.93%. In these times, this is rare enough to be noted. But it should also make us pay attention. Such a ratio with such valuations is indeed never a very good omen. If we look more closely, we see that the dividend amounts to:

• 112.99% of current recurring profits
• 74.20% average recurring profits
• 81.82% of current free cash flow
• 72.41% of average free cash flow

All this while earnings per share have been steadily declining since 2014... Buying Nestlé for its apparently generous dividend therefore carries a certain risk. Not only is its future growth compromised (the average annual growth over the last five years has only amounted to 1,79%), but in addition, without a reversal in the earnings trend, distributions may even decrease.

So we have looked everywhere, but it is impossible to find anything interesting at Nestlé at the moment, given its excessive valuation.

Balance sheet & result

Profits are falling, the dividend is almost stagnant, but at least the value of assets and cash reserves are increasing over the long term. Nestlé is therefore still managing to create some value for its shareholders, which is reflected in a slight increase in the share price of 26.77% over the last five years.

Cash reserves are nevertheless low, with a current ratio of 0.83 (a very slight decrease compared to the previous year) and a quick ratio of 0.59. The Swiss multinational is therefore faced with current financial obligations greater than its immediate resources. Nothing too worrying, however, for a company of this caliber that has several strings to its bow to pay its bills. Nestlé is not going bankrupt tomorrow, which is confirmed by a comfortable Z-Score (Altman) of 3.8.

Même si la gross margin est en légère baisse par rapport à l'année précédente, elle reste très confortable, avec 50%. La marge de free cash flow et la marge nette ne sont d'ailleurs pas en reste, avec 9.78% et 7.08%. La rentabilité est elle aussi bonne, avec un ROA de 4.77% (en baisse), un CFROA de 10.12% et un ROE de 10.43%.

The long-term debt-to-asset ratio has increased quite significantly compared to the previous year, currently standing at 13.94%. This is nevertheless quite acceptable, as the entire debt could be wiped out in just three years by the average free cash flow achieved by Nestlé. The debt also represents only 0.49 times equity.

Another interesting point: the number of shares outstanding tends to decrease over the long term, which is good news for shareholders since the share of the pie allocated to them increases at the same time.

Conclusion

Nestlé est une entreprise assez extraordinaire. Non seulement elle est active depuis plus de 150 ans, mais en plus elle s'appuie sur de très bonnes marges, une rentabilité tout à fait correcte pour son secteur d'activité, un endettement intelligent et des dépenses en besoin d'équipement relativement basses. Nestlé est une marque forte, qui s'appuie sur un réseau de vente et de production gigantesque, notamment dans les pays émergents. Ce n'est pas le premier concurrent venu qui pourra lui faire de l'ombre. De par son secteur d'activité, elle est par ailleurs relativement protégée des risques d'obsolescence technologique et des soubresauts économiques. Ceci est d'ailleurs confirmé par un beta de seulement 0.76 et une volatility de 8.68%. C'est du défensif de chez défensif ! L'entreprise basée à Vevey n'est peut-être pas une franchise à la manière de McDonald's ou Coca-Cola, but it undeniably shares many characteristics with them.

That said, as we saw at the beginning of the presentation, Nestlé is currently trading, like most stocks, at a price that is completely disconnected from reality. You would have to be reckless to venture there. Even its defensive nature cannot protect it from a correction of such a valuation. At the beginning of the 21st century, it has already lost 40% of its value in less than a year. I believe that it is quite capable of doing at least as much damage, especially if earnings per share continue to melt like snow in the sun, and the dividend has to be lowered as a result.

Finally, let us note that the F-Score (Piotroski) is four. This indicator gives us an idea of the financial strength of a company and is also a fairly effective indicator of the future performance of its stock price. Four points out of the nine possible in the Piotroski scale is quite low, and therefore not very encouraging for the future...