The news yesterday that Nestlé (NSRGY) would buy Pfizer’s (PFE) infant nutrition business for $11.9 billion has completely overshadowed last week’s stronger than expected earnings report.
For the first quarter Nestle reported organic sales growth of 7.2%. For the full year Nestlé kept its projections for organic growth at 5% to 6%. In the first quarter growth broke down as 3.1% growth in developed country economies and 13% in developing economies.
Which also tells you what you need to know about Nestlé’s acquisition. About 85% of sales for Pfizer’s business came from developing economies and about one-third of the Pfizer unit’s revenue is from China. The global infant-nutrition segment, a $45 billion market in 2011, is growing by 9% to 10% annually. But developing economies have been growing even faster. In China, for example, growth has been near 20%. Nestlé, the world’s biggest maker of infant nutrition products, though, has been losing market share in China since 2005 and the company isn’t among the top 10 in that market. The acquisition of Pfizer’s business—which came at a premium price—will go a long way to addressing that China problem by adding about $800 million in sales in that country. (Pfizer’s market share in Hong Kong and China was about 28% in 2010.) The deal also keeps Pfizer’s business out of the hands of rivals such as DANONE (DN.FP in Paris and DANOY in New York), which was known to be bidding on the unit.
Infant nutrition isn’t just a fast growing business; it’s also extremely profitable. Operating margins at Nestlé were 15% for the company overall last year, but 20% for the nutrition segment, which includes infant formula and baby foods.
After divestitures in markets such as Chile and Mexico where the Nestlé and Pfizer combination would control 90% and 73% of the market, respectively, Nestlé’s share of the global market for infant nutrition products will climb to about 27% from the current 24%.
But the acquisition fits in with another long-term Nestlé goal—to increase its market share in China for the entire Nestle stable of brands. From that point of view the acquisition of Pfizer’s nutrition business fits together with the company’s purchase of a 60% stake in Hsu Fu Chi, the maker of the popular Sachima breakfast bar in 2011.
I like Nestlé’s global clout and its focus on increasing the percentage of its business that comes from developing markets. I’d like to get the shares a little cheaper than today’s $60.88 for the New York-traded ADRs (American Depositary Receipts.) I calculate a 12-month target price of $64 for the ADRs. That’s only a 5% gain from today’s price. Even with the 3.46% yield on the ADRs that’s not quite enough to make me buy now. (You’ll have to wait a year for that dividend by the way since the ADRs pay as dividend only once a year and you’ve just missed the dividend date for this year.) A drop to $59 a share would put the total return from appreciation and dividend close to 12%. So right now this one goes on my watch list http://jubakpicks.com/watch-list/ )
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Nestlé as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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