On September 26th, Nestlé (NSRGY) held an Investor Day in London. Nestlé’s new CEO, Dr. Ulf Mark Schneider had deferred questions for months about changes in strategy to this presentation, where he proposed to lay out a plan for revitalizing the company. As the first CEO in nearly a century brought to Nestlé from the outside, and as an experienced leader with a strong history of value creation at his previous company, the expectations for Dr. Schneider were high.
When we disclosed our $3.5 billion investment in the company in June, we laid out four paths to value creation at Nestlé: 1) set a specific margin target; 2) increase leverage to return more capital to shareholders; 3) reshape the portfolio; and 4) monetize the legacy stake in L’Oréal. Dr. Schneider and his team gave a strong presentation which indicated a new approach of greater investor responsiveness. We were pleased with the overall shift in tone, particularly indicated by the willingness to give a specific margin target and commit to selling assets.
The approach to balancing sales and margin development in the new world of consumer preferences and habits represented a strong shift for Nestlé. Investors should not underestimate the substantial upside in the goals they set out, assuming they can successfully execute on them. Taken together, their commitments – including reaccelerating sales growth to mid-single digits, achieving a 17.5 – 18.5% margin target, and undertaking a CHF 20 billion share buyback – imply a return to double digit EPS growth through 2020 after five years of essentially zero growth. Meeting these goals alone would create enormous value for shareholders.
Beyond this, we were also encouraged that Nestlé will consider portfolio divestments of up to 10% of sales. This should help improve the composition of the portfolio as well as provide proceeds for incremental buybacks and growth initiatives, including M&A. As we have argued, accelerating buybacks is smart, especially given the potential to purchase shares inexpensively ahead of the expected substantial inflection in earnings. Management has already purchased more than CHF 700 million of shares since the analyst day.
We recognize that with these announcements Dr. Schneider has set a new course for Nestlé. Looking ahead, we believe there is much more opportunity to unlock value, particularly by further optimizing capital allocation and carefully evaluating the L’Oréal stake as part of a comprehensive portfolio review.
From Daniel Loeb (Trades, Portfolio)'s third quarter 2017 shareholder letter.
