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Bram de Haas
Bram de Haas
Articles (319)  | Author's Website |

Dan Loeb Goes After Target With Up to 92.5% Upside

Loeb goes after a defensive consumer staple. Estimates suggest the upside is 40-92.5%

July 06, 2018 | About:

Daniel Loeb of Third Point LLC is an activist feared for his public letters in which he criticizes company leadership. The Swiss consumer staple Nestle (XSWX:NESN) is one of its current investments. Loeb has been invested for a long time aready but just released a presentation publicly with the changes he wants to see in an effort to drum up support for his campaign. It is an interesting presentation and Loeb suggests some sensible things.

Nestle is focused on “nutrition, health and wellness.” About half of its sales are generated in growing categories like coffee, pet, nutrition and water. The Swiss giant has over 30 brands that do over a billion in U.S. dollars. I love how it's making 43% of sales in higher growth emerging markets.

Loeb called his campaign #NestleNOW. Its high level ideas are expressed on the slide shown below. It can be summarized as Loeb wanting to see: higher growth, sale of non-growth assets, sale L'Oreal shares, more buybacks and a simplified organization.

One of the key points is that Nestle owns a 23% stake in L'Oreal, which is worth about $26.91 billion at its current market cap. Loeb believes it is a good time to offload it because Nestle trades at an attractive premium:

Nestle has owned the stake for about 40 years, however. At the same time, its founder passed away last year and Nestle had an agreement not to sell until March 2018. In general it's not a great practice, from a valuation perspective, to keep enormous passive equity stakes on a balance sheet. To add some perspective, the L'Oreal stake is worth about 10% of Nestle's entire market value.

Loeb believes if the proposed changes are implemented, Nestle could achieve earnings per share of $7 by 2022. I've reviewed valuations across the large consumer staples and these trade between 16x and 19x forward earnings and from 16x to 22x trailing 12-month earnings. This would suggest a minimum share price of around $112 for Nestle -- a potential 40% increase. But the top end of that range (which could be reached if growth rates improve) would lead to a valuation of $154 per share or around 92.5% higher. That's not a bad upside in a defensive stalwart.

Disclosures: Author has no positions.

About the author:

Bram de Haas
Bram de Haas is the managing editor of The Black Swan Portfolio.

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