As I look for the stories currently developing on Nestle in India, I see this:
Well, as you can see there are too many stories to tell. There is a problem with Maggi now is an understatement. Perceptions have the power to cause much stronger impact, and consequently, can inflict real damages. They can take to very different levels irrespective of the facts.
The debate should not be about whether the product is bad for health; of course, all packaged food items are bad for health. Colas are bad too. The quicker we deal with these issues, the better it is. The question is, will we ever?
People have been eating bad food for a long time. Because history has taught us something - they will forever remain the same - how can an investor, current or potential, in Nestle think now? Will consumers be smarter, wiser?
Our favorite game has just begun, though: Can we buy Nestle stock now that it has fallen close to 15% from its previous levels? On 19 May 2015, Nestle closed at Rs.7,007.75 when this story broke out. Now it is selling at Rs.6,000 levels:
While we see a buying opportunity there are a number of questions remain to be asked.
Before the story became public, the stock was trading at a very high earnings multiple. While earnings multiple is just a proxy, the fact was that the stock was priced very high compared to its future earning power. In other words, at that price the present value of future cash flows of the business was much lower.
What has changed now is that the price has come down a bit, and might come down much more if the current perceptions continue. If we have to make an investment decision now, naturally we have to take a fresh call on the gap between price and value.
The question to ask is whether the long term earning power of Nestle has reduced significantly due to the dent on its powerful brand, or whether it is just a temporary problem that can be and will be fixed in due course. Maggie forms a significant portion of Nestle's revenues, and has been a very profitable product. The chances of diminishing brand power rubbing off on other packaged food items of Nestle cannot be ruled out. But then, it might not either.
As we gather our thoughts, we should ask what is going to be the impact on the following in the coming years?
And consequently on this?
If the developing story is not going to be good, as earnings go down, and business prospects deteriorate, so will the market price eventually. The gap between the current market price and the intrinsic value of the stock then should be very high. On the other hand, if the story is going to be as it was in Nestle's long past, well, we have an operation to make money.
Where do we stand now? We don't have crystal balls, and it is not easy to make those predictions. The answer is to play the wait and watch game. With the passage of time we will get to more stories, and hopefully, we should be in a position to take a decision.
Until then though, just don't jump the gun.
Before the story became public, the stock was trading at a very high earnings multiple. While earnings multiple is just a proxy, the fact was that the stock was priced very high compared to its future earning power. In other words, at that price the present value of future cash flows of the business was much lower.
What has changed now is that the price has come down a bit, and might come down much more if the current perceptions continue. If we have to make an investment decision now, naturally we have to take a fresh call on the gap between price and value.
The question to ask is whether the long term earning power of Nestle has reduced significantly due to the dent on its powerful brand, or whether it is just a temporary problem that can be and will be fixed in due course. Maggie forms a significant portion of Nestle's revenues, and has been a very profitable product. The chances of diminishing brand power rubbing off on other packaged food items of Nestle cannot be ruled out. But then, it might not either.
As we gather our thoughts, we should ask what is going to be the impact on the following in the coming years?
And consequently on this?
If the developing story is not going to be good, as earnings go down, and business prospects deteriorate, so will the market price eventually. The gap between the current market price and the intrinsic value of the stock then should be very high. On the other hand, if the story is going to be as it was in Nestle's long past, well, we have an operation to make money.
Where do we stand now? We don't have crystal balls, and it is not easy to make those predictions. The answer is to play the wait and watch game. With the passage of time we will get to more stories, and hopefully, we should be in a position to take a decision.
Until then though, just don't jump the gun.
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