Stock Price: SF 51,0 ($49.50 USD)
Conclusion: Following 36% re-rating since April, Nestle is now trading in line with its peers Danone (DANOY.PK) and Unilever (UN), which suggests the stock looks fairly priced. However, Nestle announced an additional share buy back programme of SF 10bn once the existing programe of SF25bn has been completed. We raise our valuation range to SF57-SF59 ($55-$57).
As expected, Nestle announced the sale of its remaining stake in Alcon (ACL) to Novartis (NVS) for $28bn in cash to be completed around mid 2010.
We estimate the dilutive impact on 2010 EPS at around 5% on a full year basis, offset by the positive impact of additional SF10bn share buy back programme.
What’s next ? We think that Nestle could afford to buy L’Oreal (LRLCY.PK) at a 20% premium in cash. The deal would be almost EPS neutral the first year and earnings enhancing the second year (+2+3%). Assuming the disposal of the Sanofi (SNY) stake, net debt / EBITDA would not exceed 2x based on 2010 estimates. At a time when L’Oreal top line growth is slowing down, we think that a combined Nestle-L’Oreal group would provide marketing and distribution synergies while strenghthening scale in developing markets. As a result, we don’t see such an acquisition risk as a negative for Nestlé and we think investors should welcome such a deal.
As to the Bettencourt family, we feel that much will depend on L’Oreal’s capacity to resume high single digit growth in sales. If not, the family could be tempted to review its options.
Disclosure: No positions