Investor's Checklist: Consumer Services

Most consumer services concepts fail in the long run, so any investment in a company in the speculative or aggressive growth stage of the business life cycle needs to be monitored more closely than the average stock investment.

Beware of stocks that have already priced in lofty growth expectations.  You can make money if you get in early enough, but you can also lose your shirt on the stock's rapid downslide.

The sector is rife with low switching costs.  Companies that establish store loyalty or store dependence are very attractive.  Tiffany's is a good example; it faces limited competition in the retail jewelery market.

Make sure to compare inventory and payables turns to determine which retailers are superior operators.  Companies that know what their customers want and how to exploit their negotiating power are more likely to make solid bets in the sector.

Keep an eye on those off-balance sheet obligations.   Many retailers have little or no debt on the books, but their overall financial health might not be that good.

Look for a buying opportunity when a solid company releases poor monthly or quarterly sales numbers.  Many investors overreact to one month's worth of bad same-store sales results, and the reason might just be bad weather or an overly difficult comparison to the prior-year period.  Focus on the fundamentals of the business and not the emotion of the stock.

Companies also tend to move in tandem when news comes out about the economy.  Look for a chance to pick up shares of a great retailer when the entire sector falls - keep that watch list handy.  


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey


Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Consumer Goods

Find companies that enjoy the cost advantages of manufacturing on a larger scale than most other competitors.  One related issue is whether the firm holds dominant market share in its categories.

Look for the firms that consistently launch successful new products - all the better if the firm is first to market with these innovations.

Check to see if the company is supporting its brand with consistent advertising.  If the firm constantly promotes its products with sale prices, it's depleting brand equity and just milking the brand for shorter-term gain.

Examine how well the firm is handling operating costs.  Occasional restructuring can help squeeze out efficiency gains and lower costs, but if the firm is regularly incurring restructuring costs and relying solely on this cost-cutting tactic to boost its business, tread carefully.

Because these mature firms generate so much free cash flow, it's important to make sure management is using it wisely.  How much of the cash is turned over to shareholders in the form of dividends or share repurchase agreements?

Keep in mind that investors may bid up a consumer goods stock during economic downturns, making the shares pricey relative to its fair value.  Look for buying opportunities when shares trade with a 20 percent to 30 percent margin of safety.  

Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Maybank raises Nestle Malaysia to 'hold'

KUALA LUMPUR, June 20  

Maybank Research raised its call on food manufacturer Nestle Malaysia Bhd to 'hold' from 'sell' on the back of a stronger earnings and exports outlook.

"Nestle's ongoing heavy capex is supporting the group's earnings momentum, particularly with an upcoming plant which should provide additional capacity," Maybank said in a note.

Maybank raised its 2013-2014 earnings forecast by 2-3 per cent due to stronger export projections and after Nestle reported a 10 per cent export sales growth in the first quarter of 2012.

"While more than 50 per cent of Nestle's exports are to ASEAN countries, there is still much potential outside ASEAN given that Nestle Malaysia is being positioned as the halal food hub for the Nestle group," Maybank said, referring to the Association of Southeast Asian Nations.

Maybank also revised its target price upwards to 54.20 ringgit per share from 52.40 ringgit earlier. As of 0125 GMT, Nestle shares rose 0.32 per cent against the Malaysian benchmark stock index's 0.06 per cent gain. — Reuters

Nestle

Nestle
Announcement	Qtr	EPS	ttm-EPS	Price
Date	No	(Cents)	(Cent)	(RM)	PE	DY	P/NTA
25/04/2012	1	67.41	196.89	55.86	28.4	3.2%	15.65
23/02/2012	4	37.13	194.59	55.80	28.7	3.2%	20.44
11/04/2011	3	46.91	174.20	50.00	28.7	3.3%	17.06
18/08/2011	2	45.44	175.56	47.90	27.3	3.4%	18.57
20/04/2011	1	65.11	172.83	48.00	27.8	3.4%	14.63
24/02/2011	4	16.74	166.91	45.30	27.1	6.1%	17.29
28/10/2010	3	48.27	186.94	43.40	23.2	3.5%	14.76
26/08/2010	2	42.71	172.68	42.00	24.3	3.6%	17.00
21/04/2010	1	59.19	166.41	34.30	20.6	4.4%	11.32
25/02/2010	4	36.77	150.01	34.14	22.8	6.6%	14.11
29/10/2009	3	34.01	146.19	33.18	22.7	5.8%	13.01
27/08/2009	2	36.44	149.51	34.50	23.1	5.5%	15.75
15/04/2009	1	42.79	147.92	30.00	20.3	6.4%	11.41
26/02/2009	4	32.95	145.36	29.50	20.3	9.4%	13.41
30/10/2008	3	37.33	126.84	27.50	21.7	4.1%	14.40
08/07/2008	2	34.85	138.96	27.25	19.6	4.2%	13.16
23/04/2008	1	40.23	134.99	29.50	21.9	3.9%	9.49

Nestle
Announcement	Revenue	PBT	Net Profit	EPS	Dividend	NTA	Qtr
Date	(RM,000)	(RM,000)	(RM,000)	(Cent)	(Cent)	(RM)	No
25/04/2012	1164128	206827	158080	67.41	0	3.57	1
23/02/2012	1188961	101847	87066	37.13	125	2.73	4
11/04/2011	1171468	138080	110000	46.91	0	2.93	3
18/08/2011	1155567	127775	106549	45.44	55	2.58	2
20/04/2011	1184998	191107	152686	65.11	0	3.28	1
24/02/2011	963893	45004	39259	16.74	115	2.62	4
28/10/2010	991076	132652	113187	48.27	0	2.94	3
26/08/2010	1050863	117470	100153	42.71	50	2.47	2
21/04/2010	1020487	170617	138798	59.19	0	3.03	1
25/02/2010	950632	99175	86224	36.77	100	2.42	4
29/10/2009	886812	106411	79760	34.01	0	2.55	3
27/08/2009	922857	104271	85455	36.44	50	2.19	2
15/04/2009	983932	130404	100354	42.79	0	2.63	1
26/02/2009	972648	104798	77279	32.95	80	2.2	4
30/10/2008	961822	113063	87542	37.33	0	1.91	3
08/07/2008	1014910	98733	81720	34.85	50	2.07	2
23/04/2008	927688	124758	94345	40.23	61.19	3.11	1

Nestle Malaysia: The Highest Price per Share Stock in Bursa Malaysia today. Well done.

Friday April 27, 2012

Nestle Malaysia plans major capex investment

By SHARIDAN M. ALI
sharidan@thestar.com.my

KUALA LUMPUR: Nestle (M) Bhd's expansion plan for additional capacity at its manufacturing facility in Shah Alam will reflect a significant jump in its capital expenditure (capex) for 2013 and 2014.

Managing director Peter R. Vogt said the company planned quite a sizeable investment to expand its manufacturing facility in Shah Alam.

“At the moment our engineering department is working on which production lines should be added and what is the exact size of investment needed,” he told reporters after the company's AGM yesterday.

Last year, Nestle Malaysia bought a piece of land adjacent to the company's plant in Shah Alam from British American Tobacco (M) Bhd (BAT) for RM36mil cash.

As for this year's capex, Vogt said it would spend about RM180mil, where a large portion of it would be for the upgrading of equipment.

“We are running 80% to 90% of capacity utilisation in many areas of our production thus we need to upgrade a lot of basic equipment,” he said.

Asked if Nestle was planning to increase the prices of its products, Vogt said the company had no plan to do so for the time being but was closely monitoring the price movements of commodities.

“We are buying forward or hedging certain commodities to minimise the impact of cost spike. We also are continuing with our Nestle Continuous Excellence initiatives, where every year we find new ways to save on cost.

“The objective of all these is to maintain the current price as long as we can,” he said.

Some of Nestle Malaysia's main raw materials used in its products are coffee, cocoa powder and milk solids.

On new product launches, Vogt said Nestle had strategised to have fewer but good quality product launches that would have long and strong marketability.

“The best example is our newest product Nescafe Dolce Gusto Espressomachine where we are planning to expand on its variety of beverages.

“Another good example is Milo, which is still strong in the market even after 40 to 50 years,” he said.

Asked whether Nestle Malaysia would market Pfizer's baby food products soon following the recent announcement that Nestle SA was acquiring Pfizer's infant nutrition division, Vogt said the transaction would need necessary regulatory approvals that would take six to 12 months.

“It's too early to say now how we are going to integrate this new development into Nestle Malaysia,” he said.

Despite the many uncertainties that could dampen global economic growth and further drive volatility in commodity costs, Nestle Malaysia on Wednesday announced a good set of financial results.

Its net profit for its first quarter ended March 31 was up 7.5% to RM158.1mil from the same quarter last year.

Turnover for the quarter stood at RM1.16bil, which reflected an 8.5% increase from a year ago.

The growth was driven by both domestic and export sales.

Vogt noted that Nestle Malaysia, which celebrated its 100th anniversary in Malaysia this year, had achieved the highest level rating in the 2011 Creating Shared Value (CSV) report, which accompanied the group's corporate and financial reports.

“The report was externally verified by Bureau Veritas Certification for an A+rating in accordance with Global Reporting Initiative 3.0 standards for the food Processing sector,” he said.

http://biz.thestar.com.my/news/story.asp?file=/2012/4/27/business/11184426&sec=business

Nestle versus Dutch Lady (A Comparative Study)

	3.4.2012		3.4.2012
	Nestle		Dutch Lady
Income Statement
	31/12/2011		31/12/2011
	RM (m)		RM (m)
Revenue	4,700.99		810.65
Gross Profit	1,542.12		304.47
Operating Profit	579.428		139.372
Financing costs	-21.398		-0.919
PBT	558.809		141.553
PAT	456.301		108.082
EPS (basic) sen	194.58		168.88
EPS (diluted) sen
Balance Sheet
NCA	987.259		74.048
CA	1015.064		324.465
Total Assets	2002.323		398.513
Total Equity	640.86		259.154
NCL	446.723		4.051
CL	914.74		135.308
Total Liabilities	1361.463		139.359
Total Eq + Liab	2002.323		398.513
Net assets per share	2.730		4.05
Cash & Eq	52.461		193.143
LT Borrowings	337.711		0
ST Borrowings	4.223		0
Net Cash	-289.473		193.143
Inventories	517.573		93.448
Trade receivables	444.854		36.713
Trade payables	878.321		121.831
Quick Ratio	0.54		1.71
Current Ratio	1.11		2.40
Cash flow statement
PBT	558.809		141.553
OPBCWC	681.492
Cash from Operations	640.247		188.290
Net CFO	581.844		161.940
CFI	-90.683		-7.135
CFF	-461.013		-47.319
Capex	-93.015		-10.882
FCF	488.829		151.058
Dividends paid	-398.650		-46.400
DPS (sen)	180.00		72.5
No of ord shares (m)
basic	234.5		64
diluted
Financial Ratios
Gross Profit Margin	32.80%		37.56%
Net Profit Margin	9.71%		13.33%
Asset Turnover	2.35		2.03
Financial Leverage	3.12		1.54
ROA	22.79%		27.12%
ROC	49.05%		163.73%
ROE	71.20%		41.71%
Valuation	3.4.2012		3.4.2012
Price	55.9		36
Market cap (m)	13108.55		2304.00
P/E	28.73		21.32
P/BV	20.45		8.89
P/FCF	26.82		15.25
P/Div	32.88		49.66
DPO ratio	0.87		0.43
EY	3.48%		4.69%
FCF/P	3.73%		6.56%
DY	3.04%		2.01%

Nestle - Projecting its future

Nestle					CAGR	CAGR
	15.3.12	31.12.10	31.12.06		2006-2010	2006-2011
	2011	2010	2006		4 Years	5 Years
Market Price $	56.3	43.34	24.8		17.82%	14.98%
Turnover $	4,700,994	4,026,319	3,275,541		7.49%	5.29%
Earnings (sen)	194.58	166.91	112.67		11.55%	10.32%
Div (sen)	180	165	100		12.47%	13.34%
P/E	28.9	26.0	22.0
EY	3.46%	3.85%	4.54%
DY	3.20%	3.81%	4.03%

Projections of Nestle using the following assumptions:
- EPS GR of 8% per year, that is, its earnings double in 9 years from 2011.
- At the end of the 9 year period in 2020, its intrinsic value was at PE of 22x.

	Projections			EPS GR 8%		Projections
	PE 22	15.3.12		CAGR		Using Historical Price
Year	2020	2011				2020
Market Price $	85.6152	56.3		4.77%		56.3
Turnover $		4700994
Earnings (sen)	389.16	194.58		8.01%		389.16
Div (sen)	360	180		8.01%		360
P/E	22.0	28.9				14.5
EY	4.55%	3.46%				6.91%
DY	4.20%	3.20%				6.39%

Using the above 2 CONSERVATIVE assumptions, you can expect a total return per year of about 9.6% if you were to invest into Nestle today.  This return is derived thus:  about 4.77% from capital appreciation and about  4.8% from dividends.

The more enterprising investor may wish to look for investments with a higher return of 15% or more.  Nevertheless, a return of 9.6% is good for many.

Please note that the projections are over a long period of 9 years.  Over the short term, the price of Nestle can be volatile too and your return may even be negative depending on the price you paid to own it.

Graham defined investment thus: An INVESTMENT OPERATION is one which, upon THOROUGH ANALYSIS, promises SAFETY OF PRINCIPAL and a SATISFACTORY RETURN. Operations NOT meeting these requirements are speculative. 

Nestle revisited

In the year 2001, the after tax EPS of Nestle was 87 sen. and its share price was trading between $19.30 to $21.20, with a P/E ranging from 22.2 to 24.4.

For someone who bought Nestle in 2001, where was the margin of safety of this company?

Margin of safety in a company comes from various sources.  Among these are the qualitative factors which are difficult to quantify mathematically.  Nestle has durable competitive advantage and economic moat.  The only assessment for the investor is to "guess intelligently" what its earnings growth will be over the next few years.  

Margin of safety concept can be applied in two ways.  One that is obvious is buying a company at a big discount to its intrinsic value.  Of course, intrinsic value is not easy to determine and does vary widely depending on the assumptions one makes in deriving this value.  Another method that is not obvious, is the margin of safety that exists too when the present price that you are paying is at a discount to its intrinsic value based on its growth projections, conservatively estimated.

Let's look at Nestle.  In 2001, you were paying 22.2 times for $1 of its after tax earnings.  Was this underpriced, fair price or overpriced relative to its intrinsic value, conservatively estimated based on its growth potential?  Growth projections are at best intelligent guesstimates.  Nestle was projected to grow its business profit at 8% per year at that time.  Therefore in 9 years from 2001, it was projected then to have an EPS of 2 x 87 sen = 174 sen.  

Assuming that Nestle in 2010 had the same PE of 22.2, its share price in 2010 should be 22.2 x 174 sen = $.38.63, or CAGR of 8%.  The average DY of Nestle was 4%.  Nestle paid out virtually all its earnings as dividends.  Therefore, its DY in 2001 based on historical cost was 4% but in 2010, its DY based on historical cost was 8% (dividend paid had also doubled).  This was an average dividend yield of about 6% per year for that period.  Should you have reinvested all the dividends back into Nestle, you would probably be able to compound your initial investment at more than 14% per year.

So, in 2001, Nestle's PE was 22.2x.  Yet, knowing its earning growth potential, conservatively estimated, there was margin of safety even buying at this price, with a reasonable degree of probability.  Using a conservative growth estimate in earnings of 8% per year, its earnings was projected to double in 2010.  Based on this EPS projection, its (future) intrinsic value would be higher and herein was the margin of safety demanded by the value investor.  

Such way of investing may not appeal to some investors.  It is too difficult for them to realise that growth creates value.  One should be happy to pay a higher PE to own a stock of higher quality, better earnings growth, lesser risk and greater certainty of a positive sustainable return.

Buying a wonderful company at a fair price has made those who know how, very rewarding and rich indeed.  There is no reason to change something that has worked consistently over 2 decades of investing.  

Nestle

Closing price on 14.3.2012
$56.30

How does an investor hope to profit from investing into a high quality growth company?

He can obtain his returns from:
1.  The dividends distributed by the company.
2.  The share price appreciation that reflects the better earnings of the company over time.
3.  Buying the share at a bargain to its fair or intrinsic price.

The long term investor will derive most of his gains from dividends and the share price appreciation of the above stock.

Let's assume that the investor was poor in his pricing of this stock and bought in 1996 at $24 per share (the highest price for that period), he would still has a lot of gains from the dividends and share appreciation of this stock when he holds this share to today.

If the investor was very good in his pricing of this stock and bought at the lowest price in 1998 at $13 per share, he would have a better return from the dividends and share appreciation of this stock when he holds this share to today.

The "worse" case scenario is not buying into this stock and holding cash, hoping to buy at very steep bargains that never arise.  The opportunity costs for holding cash instead of being invested into this stock over the short and long term can be very costly.