did you buy nestle in 2004

Nestle has had a phenomenal success in India in the last many years is something everyone knows. But just how phenomenal for the shareholder?

It depends upon at what price you bought, obviously. If you bought at 2004 high price the annual return would be 18.54% by now; and if it was 2004 low price the return would be 22.19%. The market return during the period is 12.72%. 

I tried to go back to 2004 and find out the intrinsic value of Nestle stock at that time, just to check if there was any indication of a screaming buy. Then I compared my estimated numbers to the actual numbers. This is what I saw:

Actual revenues in 2014 were Rs.98.55 b compared to my estimate of Rs.68.82 b.

Usually, we estimate that operating margins would be linear across time; however, in reality it is never so.

I missed Rs.15.57 b capex that Nestle spent in 2011 on expansion. 

Again, linearity in estimation never seems to vanish; actual return on capital has been impressive.

Finally, I estimated that Nestle would generate free cash flows to firm of Rs.44.44 b during 2005-2014. However, it actually generated Rs.56 b.

From 2015, I assumed that Nestle would be in a stable growth period, and accordingly its growth rate, return on capital and reinvestment rate were adjusted. Nestle stock had a high of Rs.720 in 2004, and EPS was Rs.26.13, implying a PE multiple of 27.56. My valuation suggested a buy at its high price, but not a screaming one. Nestle also had a low of Rs.500 in 2014.

Nevertheless, when I tried to value Nestle in 2004 assuming that I had the knowledge of its actual free cash flows (Rs.56 b), the stock became a screaming buy.

To put it differently, at PE multiple of 27.56 Nestle was a buy in 2004. Today, Nestle is immersed in an interesting tangle where its future looks bleak, and its stock is trading at a PE multiple of 45.

Will you buy that stock now? Remember what I said earlier.