10-Minute Investment Autopsy No. 3: Nestlé
Buying a way-above-average company at an average price sounded like a great idea. The market disagreed.
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here. You will get the most out of each case if you:
Pause after the “Original Thesis” section and think about what you would have done
Engage with the discussion questions and other members in the weekly thread designed to help you further improve your investing process
The Original Thesis
Who: Tom Gayner of Markel
When: June 2011
What: Nestlé (ticker: NESN SW)
The Thesis:
Rising standards of living will help boost demand for Nestlé’s products as customers upgrade to better brands
Nestlé is an exemplar of a consistently profitable and durable business, with a 150+ year successful history
Management is competent and the company’s future is as bright as the past
Earnings per share should grow high single-digits
Excluding cash from the recent sale of Alcon, Nestlé’s shares are at ~ 15x EPS. That’s an average multiple that’s too low for a way above-average company.
The company’s stock is offering a 3.6% dividend yield while you wait
Nestlé had the following financial results that Tom would have had access to when he was articulating his investment thesis:
Nestlé had an EPS CAGR of 7% in the decade ending in 2010
The stock chart up to the point when Tom presented his investment thesis was as follows:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
In the 5 years ending in 2015 EPS growth was 2% per year
Between 2010 and 2024 EPS growth was 3% per year
Over the subsequent 3 years after Tom presented his thesis Nestlé’s stock performed slightly worse than the market
The magnitude of Nestlé’s stock underperformance was much greater if we expand the time frame to today
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread