The stock of Nestle SA (OTCPK:NSRGY, 30-year Financials) appears to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $120.78 per share and the market cap of $340.2 billion, Nestle SA stock shows every sign of being modestly overvalued. GF Value for Nestle SA is shown in the chart below.
Because Nestle SA is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 0.8% over the past five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Nestle SA has a cash-to-debt ratio of 0.22, which which ranks worse than 68% of the companies in the industry of Consumer Packaged Goods. The overall financial strength of Nestle SA is 5 out of 10, which indicates that the financial strength of Nestle SA is fair. This is the debt and cash of Nestle SA over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Nestle SA has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $92.2 billion and earnings of $4.676 a share. Its operating margin of 17.05% better than 87% of the companies in the industry of Consumer Packaged Goods. Overall, GuruFocus ranks Nestle SA's profitability as fair. This is the revenue and net income of Nestle SA over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Nestle SA is 0.8%, which ranks in the middle range of the companies in the industry of Consumer Packaged Goods. The 3-year average EBITDA growth rate is 11.9%, which ranks better than 68% of the companies in the industry of Consumer Packaged Goods.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Nestle SA's return on invested capital is 9.95, and its cost of capital is 3.50. The historical ROIC vs WACC comparison of Nestle SA is shown below:
In summary, Nestle SA (OTCPK:NSRGY, 30-year Financials) stock is believed to be modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 68% of the companies in the industry of Consumer Packaged Goods. To learn more about Nestle SA stock, you can check out its 30-year Financials here.
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