Executive Summary
Nestle is the world's largest food and beverage company by sales (CHF 91.4B), with a portfolio of 2,000+ brands including 30+ billion-CHF brands. The company faces a challenging period with organic growth decelerating to 2.2% (vs. 7.2% target), management turnover (two CEOs in 2024-2025), and structural headwinds from GLP-1 weight loss drugs. However, the brand portfolio moat remains intact, ROE is strong at 30.5%, and the dividend is well-covered at 3.9% yield. The stock has declined 35% from 2021 highs, now trading at 18.6x P/E - cheap for a company of this quality.
Investment Thesis (Original):
- Large brand portfolio moat (Nespresso, Purina, Gerber, KitKat)
- Defensive consumer staples exposure
- Strong dividend history (29+ years of increases)
Thesis Validation:
- Brand moat: INTACT but facing headwinds (GLP-1, private label)
- ROE consistently > 15%: PASSED (30.5% current, 22% 10-year average)
- Organic growth 3-5%+: FAILED (2.2% in 2024 vs. 4%+ target)
- Margins stable: MARGINAL (UTOP 17.2%, declining from 17.7% in 2020)
- Debt manageable: CONCERN (Debt/Equity 226%, Net Debt CHF 56B)
Phase 1: Risk Analysis (Inversion Thinking)
"All I want to know is where I'm going to die, so I'll never go there." - Munger
Top 10 Ways This Investment Could Fail
| # | Risk | Probability | Impact | Expected Loss |
|---|---|---|---|---|
| 1 | GLP-1 drugs reduce food consumption - 6-8% reduction in spending by users, 14% US adult adoption | 40% | 20% revenue | -8% value |
| 2 | Private label gains market share - Aldi/Lidl expansion, consumer trade-down | 50% | 15% margins | -7.5% value |
| 3 | Emerging market currency weakness - 25% EM revenue, CHF strengthening | 60% | 10% earnings | -6% value |
| 4 | China geopolitical tensions - Consumer boycotts of Western brands | 30% | 15% revenue | -4.5% value |
| 5 | Management execution failure - Two CEO changes in 12 months | 40% | 10% value | -4% value |
| 6 | Dividend cut - FCF = CHF 10.7B vs. dividends CHF 7.8B, coverage 1.4x | 15% | 25% share price | -3.75% value |
| 7 | PetCare category slowdown - 21% of revenue, pet adoption post-COVID | 35% | 8% value | -2.8% value |
| 8 | Coffee commoditization - Nespresso pod competition | 25% | 10% value | -2.5% value |
| 9 | ESG/sustainability pressures - Plastic packaging, water usage | 20% | 10% value | -2% value |
| 10 | Health Science impairments - Past write-downs, category struggles | 25% | 5% value | -1.25% value |
Total Expected Value at Risk: -42.3% (cumulative, not additive)
Bear Case Summary (3 sentences)
Nestle faces structural decline as GLP-1 weight loss drugs reduce food consumption volumes by 6-8%, private label gains share in the inflation-conscious European market, and management instability (two CEO departures in 2024-2025) prevents strategic execution. Organic growth has collapsed from 7.2% to 2.2%, and the 4%+ mid-term target looks increasingly unrealistic. The 29-year dividend growth streak is at risk if FCF continues to decline and debt remains elevated at CHF 56B.
Pre-Defined Sell Triggers (Non-Price Based)
- Organic growth stays below 2% for 3+ consecutive years - Signals structural brand decay
- UTOP margin falls below 15% - Signals loss of pricing power
- Dividend cut or freeze - Signals cash flow distress
- Third CEO departure within 3 years - Signals unresolved governance issues
- Purina PetCare market share loss exceeds 5% - Core growth engine damaged
Phase 2: Financial Analysis
ROE Decomposition (DuPont Analysis)
| Year | Net Margin | Asset Turnover | Equity Multiplier | ROE |
|---|---|---|---|---|
| 2024 | 11.9% | 0.66x | 3.87x | 30.5% |
| 2023 | 12.0% | 0.74x | 3.54x | 31.6% |
| 2022 | 9.7% | 0.71x | 3.32x | 22.9% |
| 2021 | 11.7% | 0.59x | 3.05x | 21.3% |
| 2020 | 14.4% | 0.55x | 2.35x | 18.6% |
Analysis: ROE improvement from 18.6% to 30.5% is largely driven by increased leverage (equity multiplier 2.35x to 3.87x) from buybacks reducing equity base, not operational improvement. Net margins have actually declined from 14.4% to 11.9%.
ROIC vs WACC Analysis
| Metric | 2024 | 2023 | 2022 |
|---|---|---|---|
| ROIC | 14.1% | 13.9% | 12.2% |
| WACC (est.) | 6-7% | 6-7% | 6-7% |
| Spread | +7-8pp | +6-8pp | +5-6pp |
Conclusion: ROIC consistently exceeds WACC, confirming value creation. However, spread is narrowing relative to 2020-2021 levels.
Owner Earnings Calculation (Buffett Method)
Owner Earnings = Net Income + D&A - Maintenance CapEx - Working Capital Increase
FY 2024:
Net Income: CHF 10.9B
+ Depreciation: CHF 3.5B (estimated)
- Maintenance CapEx: CHF 4.0B (estimated 70% of CHF 5.6B total)
- WC Increase: CHF 0.5B (estimated)
= Owner Earnings: CHF 9.9B
Owner Earnings/Share: CHF 9.9B / 2.57B = CHF 3.85
Valuation Trinity
1. Liquidation Value (Floor)
| Asset | Book Value | Discount | Liquidation Value |
|---|---|---|---|
| Cash & Equivalents | CHF 6.9B | 100% | CHF 6.9B |
| Receivables | CHF 12.5B | 80% | CHF 10.0B |
| Inventory | CHF 11.5B | 60% | CHF 6.9B |
| PP&E | CHF 31.0B | 40% | CHF 12.4B |
| Intangibles/Goodwill | CHF 49.8B | 0% | CHF 0 |
| Total Assets | CHF 36.2B | ||
| - Total Liabilities | (CHF 102.6B) | ||
| Net Liquidation | (CHF 66.4B) |
Conclusion: Negative liquidation value - this is NOT a Graham net-net. Dependent on going concern value.
2. DCF Analysis (Conservative)
Assumptions:
- FCF Year 0: CHF 10.7B
- Growth Years 1-5: 2% (below guidance)
- Growth Years 6-10: 3%
- Terminal Growth: 2%
- Discount Rate: 8%
Year 1-5 FCF PV: CHF 44.5B
Year 6-10 FCF PV: CHF 35.1B
Terminal Value PV: CHF 109.0B
Enterprise Value: CHF 188.6B
- Net Debt: (CHF 56.0B)
Equity Value: CHF 132.6B
Per Share: CHF 51.6
Conservative DCF Value: CHF 52/share
3. Private Market Value
- Recent beverage M&A multiples: 12-15x EBITDA
- Nestle EBITDA (est.): CHF 18.5B
- Implied EV: CHF 222-278B
- Less Net Debt: CHF 56B
- Equity Value: CHF 166-222B
- Per Share: CHF 65-86
Private Market Value: CHF 75/share (midpoint)
4. Owner Earnings Multiple
Owner Earnings: CHF 3.85/share
10x Multiple (conservative): CHF 38.50
15x Multiple (fair): CHF 57.75
20x Multiple (premium): CHF 77.00
Margin of Safety Calculation
| Valuation Method | Value/Share | Current Price | MOS |
|---|---|---|---|
| Liquidation Value | Negative | CHF 77.83 | N/A |
| DCF (Conservative) | CHF 52 | CHF 77.83 | -50% |
| Private Market | CHF 75 | CHF 77.83 | -4% |
| Owner Earnings 15x | CHF 58 | CHF 77.83 | -35% |
| Owner Earnings 20x | CHF 77 | CHF 77.83 | -1% |
Weighted Intrinsic Value: CHF 68/share (50% DCF, 25% PMV, 25% Owner Earnings)
Current MOS: -14% (trading ABOVE intrinsic value)
Phase 3: Moat Assessment
Moat Sources
| Moat Type | Strength | Evidence | Durability |
|---|---|---|---|
| Brand Portfolio | HIGH | 30+ billion-CHF brands, 150+ year heritage | 10+ years |
| Distribution Scale | HIGH | Presence in 189 countries, retail relationships | 10+ years |
| R&D Capability | MODERATE | 34 R&D centers, 5,000 scientists | 5-10 years |
| Switching Costs (B2B) | MODERATE | Food service/hospitality contracts | 5 years |
| Network Effects | LOW | Nespresso ecosystem modest | 3-5 years |
Brand Portfolio Analysis
| Brand Category | Key Brands | Market Position | Moat Durability |
|---|---|---|---|
| Coffee | Nescafe, Nespresso, Starbucks (license) | #1 global coffee | STRONG |
| PetCare | Purina, Friskies, Fancy Feast | #1 global pet food | STRONG |
| Infant Nutrition | Gerber, NAN | #2 global infant formula | MODERATE |
| Confectionery | KitKat, Smarties | Top 3 global | MODERATE |
| Water | Perrier, S.Pellegrino | Premium segment leader | MODERATE |
Moat Erosion Forces
| Threat | Severity (1-5) | Timeline | Company Mitigation |
|---|---|---|---|
| Private label growth | 4 | Ongoing | Premium positioning, brand investment |
| GLP-1 volume impact | 3 | 3-10 years | Vital Pursuit product line |
| Emerging market competition | 3 | 5 years | Local brand acquisitions |
| E-commerce disruption | 2 | Ongoing | D2C Nespresso, Amazon partnership |
| ESG/plastic regulations | 2 | 5-10 years | Sustainable packaging initiatives |
Key Question: Will this moat be wider or narrower in 10 years?
Assessment: SAME to SLIGHTLY NARROWER
- Brand heritage will persist, but consumer packaged goods face structural headwinds
- Private label growth in Europe erodes mass-market share
- GLP-1 drugs create genuine category risk (6-8% volume reduction)
- PetCare and Coffee remain strong but growth will slow
- Scale advantages being challenged by regional players
Phase 4: Management & Capital Allocation
CEO Transition Risk
| CEO | Tenure | Departure Reason |
|---|---|---|
| Mark Schneider | 2017-2024 | Departed August 2024, no succession plan |
| Laurent Freixe | 2024-2025 | Terminated September 2025, code of conduct violation |
| Philipp Navratil | 2025-present | Newly appointed, untested |
Critical Concern: Two CEO departures in 12 months signals governance instability. Need to monitor new CEO execution.
Capital Allocation Track Record (5 Years)
| Use of FCF | Amount | % of FCF | Assessment |
|---|---|---|---|
| Dividends | CHF 7.8B | 73% | Committed but consuming |
| Buybacks | CHF 4.5B | 42% | Reduced book value, elevated ROE |
| Debt Paydown | CHF 0 | 0% | Net debt increased |
| M&A | CHF 1-2B | 15% | De-emphasized under Freixe |
| Organic CapEx | CHF 5.6B | 52% | Maintenance focused |
Concern: Dividends + buybacks exceed FCF in some years, funded by debt. Buyback program completed Dec 2024 with no new program announced.
Insider Activity
No significant insider buying or selling detected in 2024-2025. New CEO too recent for meaningful signals.
Phase 5: Thesis Validation for Owned Position
Original Thesis Checkpoints
| Thesis Element | Original Expectation | Current Reality | Status |
|---|---|---|---|
| Brand portfolio moat | HIGH durability | Intact but challenged | PASS (marginal) |
| ROE > 15% | Consistent | 30.5% (leverage-driven) | PASS |
| Organic growth 3-5%+ | Sustainable | 2.2% (missed 4%+ target) | FAIL |
| Defensive staples | Low volatility | Stock down 35% from peak | MARGINAL |
| Dividend safety | Growing dividends | 29yr streak intact, 1.4x covered | PASS |
| Margin stability | 17%+ UTOP | 17.2% declining to 16% guide | MARGINAL |
Thesis Validation Score: 3.5/6 PASSING
The thesis is MARGINAL - not broken but weakened. Key concerns:
- Organic growth has structurally declined
- ROE improvement is leverage-driven, not operational
- Management instability creates execution risk
Phase 6: Decision Synthesis
Valuation Summary
+-----------------------------------------------------------+
| INVESTMENT RECOMMENDATION |
+-----------------------------------------------------------+
| Company: Nestle SA Ticker: NESN.SW |
| Current Price: CHF 77.83 Date: 2025-12-25 |
+-----------------------------------------------------------+
| VALUATION SUMMARY |
| +-------------------------+-----------+-------------------+ |
| | Method | Value | vs Current Price | |
| +-------------------------+-----------+-------------------+ |
| | Graham Number | N/A | N/A (neg equity) | |
| | Net Current Asset Value | Negative | N/A | |
| | Liquidation Value | Negative | N/A | |
| | DCF (Conservative) | CHF 52 | -50% MOS | |
| | Private Market Value | CHF 75 | -4% MOS | |
| | Owner Earnings (15x) | CHF 58 | -35% MOS | |
| | Owner Earnings (20x) | CHF 77 | -1% MOS | |
| +-------------------------+-----------+-------------------+ |
| |
| INTRINSIC VALUE ESTIMATE: CHF 68 (weighted average) |
| MARGIN OF SAFETY: -14% (OVERVALUED) |
+-----------------------------------------------------------+
| RECOMMENDATION: [X] HOLD [ ] BUY [ ] SELL [ ] TRIM |
+-----------------------------------------------------------+
| BUY PRICE (30% MOS): CHF 48 |
| ACCUMULATE PRICE (20% MOS): CHF 54 |
| FAIR VALUE: CHF 68 |
| TAKE PROFITS PRICE: CHF 82 (+20%) |
| SELL PRICE: CHF 102 (+50%) |
+-----------------------------------------------------------+
| POSITION SIZE: 20.37% (OVERWEIGHT - consider trimming) |
| CATALYST: New CEO execution + organic growth recovery |
| PRIMARY RISK: GLP-1 drug adoption reduces food volumes |
| SELL TRIGGER: Organic growth <2% for 3 years OR div cut |
+-----------------------------------------------------------+
Position Assessment
| Factor | Assessment |
|---|---|
| Current Allocation | 20.37% - OVERWEIGHT |
| Thesis Status | MARGINAL - not broken but weakened |
| Valuation | OVERVALUED by ~14% |
| Dividend Yield | 3.9% - Attractive income |
| Total Return Potential | Limited upside at current price |
Recommendation Rationale
HOLD rather than SELL because:
- Dividend yield of 3.9% provides ongoing income
- Brand moat is weakened but not broken
- Stock already down 35% - selling into weakness crystalizes loss
- New CEO deserves 12-24 months to execute
- Private market value close to current price
NOT BUYING MORE because:
- Trading 14% above intrinsic value estimate
- Organic growth trajectory is concerning
- Management instability unresolved
- GLP-1 risk is real and underappreciated
Monitoring Metrics
| Metric | Current | Threshold | Action if Breached |
|---|---|---|---|
| Organic Growth | 2.2% | <2% for 3 years | SELL |
| UTOP Margin | 17.2% | <15% | SELL |
| Dividend Coverage | 1.4x | <1.1x | REDUCE |
| ROE | 30.5% | <15% | REVIEW |
| Net Debt/EBITDA | 3.0x | >4.0x | REVIEW |
Sources Used
Primary Documents
- Nestle Full-Year Results 2024 Press Release - nestle.com
- Nestle 2024 Financial Statements PDF - nestle.com
- Nestle Capital Markets Day 2024 CEO Presentation - nestle.com
- EODHD Historical Prices API (2020-2025)
Secondary Sources
- Yahoo Finance - NESN.SW key statistics
- GuruFocus - ROE, ROIC historical data
- MacroTrends - Profit margins, revenue history
- News articles on GLP-1 drug impact (CNN, CNBC, Food Navigator)
- Analyst reports on management changes
Appendix: Scenario Analysis
Probability-Weighted Expected Return
| Scenario | Probability | Price Target | Return | Weighted Return |
|---|---|---|---|---|
| Bull (growth recovery) | 20% | CHF 100 | +28% | +5.6% |
| Base (muddle through) | 50% | CHF 75 | -4% | -2.0% |
| Bear (GLP-1 impact) | 25% | CHF 55 | -29% | -7.3% |
| Disaster (div cut) | 5% | CHF 40 | -49% | -2.4% |
| Expected Return | 100% | -6.1% |
Psychology Check (Munger)
| Bias | Present? | Mitigation |
|---|---|---|
| Commitment bias | YES - already own 20% | Fresh analysis with sell triggers |
| Liking tendency | MODERATE - iconic brands | Focused on numbers, not brands |
| Deprival reaction | POSSIBLE - down 35% | Price drop is sunk cost |
| Social proof | NO - not following gurus | Independent analysis |
=== VERDICT: NESN | HOLD | Fair Value: CHF 68 | Accumulate Below: CHF 54 | Reason: Thesis marginal (organic growth 2.2% vs 4%+ target), stock overvalued 14%, but 3.9% dividend yield and intact (though weakening) brand moat warrant holding - not adding at current price. ===