Share tip of the week: a classic defensive play
By
Tim Price Aug 27, 2010
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I stand firmly in the deflation camp and so feel somewhat uneasy recommending any stocks at present – deflation will provide a challenging headwind for equities as an asset class. But I'm happy to make an exception in the case of Nestlé, which is head and shoulders above most of the world as a defensive stock.
Nestlé is the world's largest food group (its main rivals are Unilever and Danone). It's best known for Nescafé coffee and Kit Kat bars, acquired via its purchase of Rowntree in 1988. At a time when soft commodity prices are surging across the board, tipping a food company might appear perverse. In fact, Nestlé is well positioned as a classic defensive. It also offers some emerging market 'pixie dust', given its exposure to the developing world, where recent company sales were up by more than 10% to CHF8.6bn ($8.1bn). Notwithstanding the fact that Nestlé CFO James Singh describes current conditions as "one of the most difficult periods in decades", a combination of cost controls and IT efficiency is enabling the firm to outperform its rivals.
And there's more to this business than just coffee and chocolate. Nestlé's Herta brand is the biggest seller of frankfurters in Britain, for example. The business also incorporates cakes, creams and desserts, Purina pet food, ice cream and Nestlé's nutrition arm, which is focused on healthcare.
The company's origins go back to 1868 when Henri Nestlé, a pharmacist, set up in London. The first UK factory followed in 1901 and by 1905 the firm had merged with the Anglo-Swiss Condensed Milk Company. As trade barriers tumbled in the 1990s, Nestlé was quick to enter developing markets – these now account for a sizeable slice of group revenues.
Nestlé (VX: NESN), rated a BUY by Nomura
Presenting the company's glowing first-half results, Paul Bulcke, group CEO, pointed to increased investment in its various brands. He also reconfirmed his earlier full-year guidance in food and beverages – a target for organic growth of around 5%, together with an increase in overall earnings in constant currencies. Currency is another reason to like the stock. The Swiss francs in which Nestlé shares are denominated are a useful currency diversifier, given the headwinds blowing against sterling (as well as the US dollar and the euro).
Indeed, the Swiss National Bank recently reported a CHF2.78bn loss on the back of its (so far failed) intervention in the foreign-exchange market to try and prevent the appreciation of its currency, particularly against a sickly euro. The reality is that safe-haven investors like Switzerland and its currency, and so do I. No mention of a stock would be complete without reference to its Altman Z score, and Nestlé's, at 3.9, is sound, according to Bloomberg analytics. Finally, Nestlé is nothing if not well covered by analysts: 42 brokers follow the stock, with 27 rating it as a 'Buy', and 15 as a 'Hold'. Nobody recommends selling the shares, which for once seems entirely justified.
Recommendation: DEFENSIVE BUY at CHF52
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