Nestle just paid Starbucks $7.15 Billion for the right to sell Starbucks coffee worldwide. The question is, will selling Starbucks coffee help Nestle? Reuters reports on the global coffee alliance.
The deal on Monday for a business with $2 billion in sales reinforces Nestle’s position as the world’s biggest coffee company tries to fortify its place atop a fast-changing market.
It is a bold stroke by new Nestle Chief Executive Mark Schneider, who has made coffee a strategic priority as he tries to convince uneasy shareholders, including activist Third Point, that he can boost the sprawling group’s performance.
Bernstein analyst Andrew Wood said that Nestle’s third-biggest acquisition would allow the Swiss company to expand the brand through its global distribution network.
Nestle shares rose 1.4 percent by mid-session, having fallen by more than 8 percent so far this year. Starbucks stock was indicated 2.8 percent higher.
Nestle is the largest food company in the world with operations in 186 countries. Its roots go back to the 19th century and sales of condensed milk and infant formulas. Today Nestle has the sort of problems commonly seen in old, well established companies. They do not have a lot of room to grow. As such there is always the risk of activist shareholders looking to break up the company to “create value of stockholders.” Thus Nestle is looking to expand its already huge coffee product line with the Starbucks brand. Starbucks is perhaps the most recognized high end coffee name in the world. Will selling Starbucks coffee help Nestle? The market thinks so, as the stock edged up a percent or so.
Is Nestle a Good Investment?
Last week we wrote about what to look for in value investing.
Investors like Warren Buffett look for companies whose products and business plans are easy to understand. And they look for companies that are reliably going to be making money with those products and business plans 5 and 10 years in the future. Buffett famously explained that he did not know what a given tech product would be worth 5 years hence in a fast evolving tech world. But he did have a pretty good idea what a Snickers bar would be worth! Value investments have two characteristics, intrinsic value and margin of safety.
Nestle certainly seems to be a secure investment and perhaps a good one if the tech darlings take a hit in the near future. In that case investors will flock to companies like Nestle for security and thereby drive up their stock prices. But what do you get out of investing in Nestle? After a ten for one stock split in 2008 the company traded at $43 a share. At the end of 2017 it traded briefly for $85 a share before dipping back into the $70 range. News of the Starbucks deal has lifted the stock by $2 a share. In short the stock price has gone up by about 70% in the last ten years and the company has paid a dividend of around 3%. During this time the S&P 500 has doubled.
The argument can be made that Nestle was not a good investment coming out of the market crash of 2008 and the Great Recession. However, let’s look at how Nestle compared to the S&P 500 going into the 2008 crash. In October of 2007 the S&P 500 was above 1500 and it lost half its value when the market bottomed out in March of 2009. Allowing for the 2008 stock split, Nestle lost a couple of percent of its stock value at most during the crash.
Nestle is a secure stock that is likely to grow slowly over the years and has a huge margin of safety in the event of a market crash.