Coming back to Nestle.
1. Power packed Brands – Check
2. Market Leaders in categories that it operates in – Check
3. Sourcing Strength – Check
Tremendous Barriers to Entry in the Infant Food market – Check
Once again, it was really interesting to hear Saurabh Mukherjea talk about Nestle’s longevity of their Moat around Infant Food
To summarize the longevity of Moat around infant food, here are the key points:
Infant Food in India is a prescription drug which means it cannot be advertised in the country
WHO prescribes mother’s breast milk to be the best source of nutrition, thus the Government would be skeptical to grant fresh licenses for manufacturing Infant Food in India
Infant food is a high margin, fast moving product. It is rarely discounted and always in demand bought by parents around the year.
Nestle’s numbers have been phenomenal and ticks all the boxes of what Saurabh Mukherjea calls to be a “Classic Compounder” making it a great company. It’s Return on Capital Empoyed (
return) has been consistently higher than 50% going to even 130–140% in some years for decades. The company has planned multiple launches for the future and is presently focusing on giving more extensions to its existing brands. dhandha’s
Anytime it makes over and above what it does – which it does most of the times, it gives it as special dividend – over and above their regular dividend. They have announced a total dividend payout of 255 till December ’19.
Just to give you some perspective, I use the Maggi masala sachet on almost everything from chips to egg whites and what not. It was launched at a price of 3 then 4 and now it’s at 5 within almost a year (pricing power).
I have seen various street food vendors use the masala on almost anything and everything that they sell.
Nescafe Chilled Latte was a product that was long overdue and we can see how that is being consumed all round the year now.
How can we forget our beloved Maggi?
It still has around 20–30 launches planned for the
(Every time I do a fresh search about Nestle India, I find new products. For example, this time I found a higher value-added pack for Nescafe and Resource protein. See it for yourself) here.
Should you buy the Nestle stock? – In a nutshell, identify great companies and invest in them – don’t have a trader’s mentality of shortchanging yourself saying – oh look, I bought at 100, exited at 150 only to realize the stock is now at 4,000 8 years later. Think of yourself as a part owner of the Company. Would you want to setup a factory, invest in brands, hire a sales team and fire them after 4 months?
The High P/E Dilemma
There is a very popular notion centered around investing which often misinterprets the PE ratio to be directly proportional to being the degree of pricing. At the end of the day, the PE ratio is just a measure of what is the willingness of Investors to pay for a particular stock based on past projections for the future. That assumption by it’s very nature is flawed.
A high PE ratio should always be seen with respect, what it basically tells us that investors or the market today is willing to pay a very high premium to the earnings potential of the stocks based on past performance or future assumptions.
This gives a very little margin of safety to the investor who tries to buy this stock. Now this leaves us with two conclusions –
Either the stock of the company is a really great asset to own
The collective wisdom of investors is foolish and the asset has become thoroughly overpriced
Howard Marks has time and again told us a very simple philosophy to investing where you buy an asset cheap and sell it when it becomes expensive to make money. On the other hand you could buy a great company’s stock at a high valuation – think Kodak, Polaroid, AIG, IBM which either went bankrupt or was close to bankruptcy when held over a long period of time.
The examples cited above are again not related to India and India as a market gives us a very unique structure to work with. Coming back to Nestle, their tryst with high PE has stayed in India dating back to almost ’90. You can read more about this
Key Financial Snapshot