Is This Food Giant Printing Money?


"A Swiss bank that prints food," is what a Nestle scientist called the company. This five star CAPS-rated food giant manufactures food for everyone in your family from Baby to Grampa. Fido and Fluffy, too..

Nestle just won the title of the world's fifth "most beloved" brand in an APCO Insight survey of 70,000 consumers in 15 global markets. It was the number one most beloved food and beverage brand. For the eighth straight year it received the number one rank for a food and beverage company in Fortune's list of "100 Most Admired Companies."

Between womb and tomb
The company has dedicated itself to a new emphasis on infant nutrition and senior nutrition, as CEO Paul Bulcke detailed at Investor Day at Nestle's Vevey, Switzerland company headquarters in October.

The company holds No. 1 market share in infant formula in most emerging markets, No. 2 in Europe, and No. 3 in North America.

In 2012, Nestle acquired Wyeth Nutrition from Pfizer and its portfolio of womb to tomb therapeutic nutrition products. Wyeth Nutrition is a different animal now with 10% of sales in 2010 coming from innovated new or renovated products and 75% of sales from entirely new or refreshed products.

Runs like a Swiss watch
The company prides itself on its attention to detail. The raw materials for infant nutrition products are subjected to 20-50 tests and examined for 1,000 contaminants. Then, finished batches, all manufactured in-house, are subjected to 50-100 tests per batch and 1,000 tests per year per formula recipe. And you wondered why formula costs so much and is kept under lock and key.

That kind of attention to detail is imperative. Like a Swiss watch, Nestle has many moving parts. In addition to nutrition solutions, its food and beverage division manufactures well-known brands of candy, frozen foods, juices, waters and more.

As CEO Bulcke said in the Investor Day presentation the company was charged with having so many brands that it let underperforming brands underperform for too long. They're not going to slide any more, he assured investors.

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A world of competitors
With so many brands come many competitors, chief among them: Hershey, Mondelez, Mead Johnson Nutrition , Unilever, Abbott Labs and GroupeDanone.

Nestle's most direct rival in the nutrition solution space, Abbott, is the number one infant nutritional company in the US. Abbott profits from adult nutrition, canned nutritional products that supplement meals for the aged, and infant nutrition. The company has more than 17 brands that address the needs of babies, the aging, and athletes.

Abbott has a subdivision of therapeutic nutrition for sufferers of diseases such as diabetes, cancer, and osteoporosis. Abbott co-founded the Alliance to Advance Patient Nutrition to battle and prevent malnutrition in hospital patients.

Abbott's other divisions include established pharmaceuticals (generics), diagnostic products, and medical devices. It isn't a pure play on supplemental nutrition, either. On Oct. 16 Abbott reported weaker than expected sales from its nutrition division due to Chinese supplier problems. Sales from its other divisions offset that weakness helping the stock surge 5%.

Mead Johnson Nutrition, spun off from Bristol Myers Squibb in 2009, is the pure play on pediatric nutrition. It offers 70 products, which include regular formulas, specialty feeding solutions for infants with food allergies and special gastric disorders, and nutritional supplementation for older children, expectant, and breastfeeding mothers.

The global company covers 50 markets, but Mead Johnson is focusing on emerging markets, with two of its three Pediatric Nutrition Institutes located in Mexico and China. Currently 30% of sales come from North America/Europe, 30% from China/Hong Kong, and 40% from South Asia and Latin America.

However, Nestle still has the upper hand in emerging markets like India and China because of its reputation for safety and painstaking testing. China's demand for safe, foreign baby formula is so great that smuggling and black market operations of non-Chinese formula are rife after a tragic scandal in 2008 involving melamine-tainted formula from a Chinese manufacturer that killed six babies and sickened over 300,000.

The nitty-gritty
Nestle's preference with free cash flow is to pay out a dividend. For the near future, capital expenditures have been capped by Bulcke, and no new acquisitions are planned. Bulcke expects year over year solid 5%-6% margin growth. Nestle's net profit margin is 11.41% with trailing twelve month revenues of $101.39 billion. Nestle offers a 2.7% yield and trades at an 18.85 trailing earnings multiple.

Abbott has a market cap of $55.3 billion and trades at a 16.04 forward earnings multiple with a yield of 1.70%. This Dividend Aristocrat has raised its dividend for 39 years straight and has paid a dividend for over 350 consecutive quarters. The company raised its dividend again by 57% in October. Abbott's net profit margin is 12.04%.

Mead Johnson has a market cap of $15.9 billion with a forward earnings multiple of 21.89 and net profit margin of 15.4%. Trailing twelve month revenue came in at $4 billion, and the company offers a yield of 1.80%.

The Foolish takeaway
All three stocks are off 52-week highs thanks to concerns over China suppliers and Hong Kong export restrictions. They have underperformed the S&P 500 this year. Going forward, these companies are optimistic that these concerns will soon be in the rear view window.

Of these stocks, Abbott and Nestle are preferred because they both have other revenue streams to offset nutrition weakness. Nestle should continue to print money with both its divisions and its emerging market nutrition dominance.

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