Nestle’s got a pile of cash, good growth prospects, and a stock price that’s a tad too high
Nestle (NSRGY), the largest food company in the world, continues to slice and dice, in an effort to shed underperforming or low margin businesses and pick up higher growth, higher margin opportunities.
Nestle has finished selling its last piece of Alcon, its eye-care business, to drug-maker Novartis (NVS). The sale of the 52% of the company that Nestle sold brought in $28.3 billion.
Nestle will use a substantial part of that to reduce the company’s debt, which stood at $29 billion at the end of June. That should maintain the company’s AA debt rating. (Some will also go to fund a plan to buy back about $10 billion in the company’s shares through 2011.)
Paying down debt doesn’t seem very exciting but it’s essential to the company’s strategy of buying growth opportunities in the nutrition, health, and wellness sectors of the food and beverage market. (A company has to clear room on its balance sheet to finance acquisitions either with cash or new debt) This year Nestle bought a frozen pizza business from Kraft, a United Kingdom nutrition company Vitaflo, and Mivina, a maker of instant noodles in the Ukraine. Expect more deals now that the Alcon sale is done.
Nestle is likely to face a tougher second half in 2010 thanks to rising prices of commodities such as cocoa and palm oil.
Update Ctrip.com (CTRP)
It’s tempting to say that the 6% drop in Ctrip.com’s (CTRP) shares on August 10 after the company’s August 9 earnings report was just the usual selling on the news by momentum investors who are unhappy that the company only beat Wall Street estimates by 2 cents a share and didn’t raise guidance for its third quarter.
But when you’re looking at a stock that’s trading at 43.5 times projected 2010 earnings per share, I’m not sure there’s any “just” about an earnings report that didn’t shoot out the lights.
There’s just enough in the numbers to concern any investor counting on the company to keep growing earnings by 30%–at a minimum.
Here’s what the company reported.
For the second quarter Ctrip.com, a strong No. 1 in China’s online travel industry, reported earnings of 23 cents a share. That was two cents a share above Wall Street projections and represents year-to-year earnings per share growth of 35%.
Revenue climbed by 46% from the second quarter of 2009 to $103 million. That was above the Wall Street consensus for revenues of $98.9 million.
From there the numbers get a little disconcerting for an expensive growth stock.
Sell McDonald’s (MCD)
McDonald’s (MCD) has put together an extraordinary 2010—so far. But I’m not as excited about the second half of the year, especially not at current share prices.
On Monday August 9 McDonald’s announced that global comparable store sales climbed 7% in July from July 2009. Sales at restaurants open for 13 months or more rose 5.7% in the United States and 10% in Asia, Africa, and the Middle East.
McDonald’s sales are indeed hitting on all cylinders: the dollar menu, new higher priced menu offers, frozen frappes, and upgraded coffee drinks have all boosted sales since their roll outs.
However, it’s not sales that worry me but margins. In the first half of 2010 McDonald’s benefitted from falling commodity prices for wheat, corn syrup, sugar, beef, chicken and other raw materials. In its last conference call with analysts the company said that it expected commodity prices to continue to decline in the second half of the year but at a reduced rate.
With wheat and other grain prices soaring on drought, wild fires, and grain export bans, I don’t think declining commodity prices are guaranteed in the second half of 2010.
That wouldn’t be a problem except that the stock has become rather expensive given the 13% earnings growth projected by analysts for 2010 or the 8.2% growth rate projected for 2011.
Update McDonald’s (MCD)
If you’re worried that the U.S. and global economies are going to slow in the second half of 2010, then McDonald’s (MCD) on its second quarter performance is the stock for you. (Of course if you think the upswing of the last week isn’t just a bounce, McDonald’s isn’t the stock for you. See my post Two weeks of summer rally or three days of bounce? )
The company reported earnings on July 23 for the quarter of $1.13, a penny better than the Wall Street consensus, and revenue of $5.95 billion, slightly above projections for $5.91 billion. Comparable store sales climbed 3.7% in the United States, 5.2% in Europe, and 4.6% in the Asia/Pacific, Middle East and Africa business unit.
Today’s retail sales numbers were no where as scary as they seem
There was nothing especially scary in today’s retail sales data. There was certainly nothing very surprising.
Yes, I know the headlines played up the 0.5% drop in consumer spending in June. And the fact that this marked the second decline in a row after the 1.1% drop in May. And the fact that the 0.5% retreat was worse than the consensus call for a 0.2% falls.
But repeat after me: I never stop with the headline number on any government data—whether from the United States, China or anywhere else.
First, in looking at the retail sales number it’s good to take out the very volatile numbers for car sales, gasoline (highly seasonal), and building materials (the government just ended a big home buying subsidy). If you look at retail sales minus those sectors, the small June drop turns into a modest June increase of 0.2%. That number is in line with expectations among economists.
Second, weakness in retail sales is par for the course at this stage of an economic recovery—as is slowing in the economy in general.
