How High Can Nestle Climb?

By Markets Fool.com


Image source: Nestle.

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Chocolate lovers around the world know Nestle (NASDAQOTH: NSRGY) as a giant of the industry, with its Crunch bars highlighting the company's U.S. offerings. Yet Nestle's food empire extends well beyond the candy aisle, including Coffee-Mate, Haagen-Dazs ice cream, and Hot Pockets frozen food items. The company has become attractive to those seeking solid dividend income, and coming into its release of first-half results on Thursday, Nestle investors expect for the food giant to continue producing consistent growth at an attractive rate. Let's take an early look at Nestle to see what's been happening with the company and whether investors can expect more from its results ahead.

Stats on Nestle

Expected EPS Growth

8.8%

Expected Revenue Growth

1.1%

Forward Earnings Multiple

23.9

Expected 5-Year Annualized Growth Rate

8.1%

Data source: Yahoo! Finance.

How tasty will Nestle earnings be?

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In recent months, investors have cut their views on how profitable Nestle is likely to be. They've reduced their full-year 2016 projections by more than 6%, and they've made smaller cuts to their 2017 predictions as well. Yet the stock has been friendly to investors, rising 10% since early May.

Nestle's first-quarter results helped to continue the positive tone that longtime investors have gotten used to seeing from the food giant. Overall sales were roughly flat, but after taking into account foreign currency impacts, organic growth of 3.9% showed the general strength of Nestle's operations. The fastest growth rates came from the Americas, but solid results in the greater European area and the Asia-Oceania-Southern Africa segment also resulted in growth there. Emerging markets outperformed developed markets, and most of Nestle's growth came from real gains in product volume due to relatively weak pricing power in an overall deflationary environment.

What's behind Nestle's success

A closer look at Nestle's business shows just how broad its product offerings are. In North America, an emphasis on frozen food led the company to make promotional efforts to boost sales of Lean Cuisine and Stouffer's products, and the company's Purina pet-care line also did well. The Nescafe brand was instrumental in Nestle's Latin American results, and coffee-related products play a key role across the globe for the company. Across its other broad product segments, Nestle saw the fastest organic growth in its line of waters, while the nutrition segment suffered from relatively weak pricing. The Nestle Health Science unit benefited from interest in consumer-oriented products like Carnation Breakfast Essentials, and the company acquired consumer acne company Proactiv to add to its skin health segment.

For dividend investors, the appeal of Nestle is its consistent practice of raising its payouts to shareholders year in and year out. Nestle isn't eligible for consideration as a Dividend Aristocrat because it isn't a U.S. company, but if it were, its 20-year track record of annual increases would leave the company within striking distance of joining the elite group.

Yet Nestle hasn't given up on growth. The company has increasingly gone beyond its traditional focus to look at healthier offerings, and its decision to name Ulf Mark Schneider as CEO in June highlights the value that Nestle has placed on experience in the healthcare field. At the same time, though, Nestle is working hard to overcome negative reputational damage stemming from recalls of its Maggi noodle line in India. With many of its competitors looking at improving the health attributes of their food products in the face of regulatory scrutiny of obesity-linked products, Nestle is trying to stay ahead of the curve.

In the Nestle earnings report, investors should be sure to see how Schneider makes his first mark on the company's strategic direction. As a giant in the industry, Nestle has plenty of future growth potential, but it will be important for the company to identify the best strategies available in order to take maximum advantage of its valuable brands and their ability to drive gains in sales and profits.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Nestle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.