Acquisition No Game-Changer for Nestle
The purchase of Starbucks' consumer products lineup is strategically a net positive but neutral to our valuation.
Nestle's (NSRGY) acquisition of Starbucks' consumer product range, which includes the portfolio of soluble, roast and ground, and capsule coffee, as well as Teavana tea, is strategically a net positive in our view, but neutral to our valuation. We intend to update our model after the analyst call but do not expect to change our CHF 79 fair value estimate or our wide moat rating. We think Nestle's market value offers limited upside to its intrinsic value, particularly after the recent pullback across the consumer staples sector.
Nestle has been underperforming both its own historical performance and many of its multinational consumer stales peers, and we think investors want to see an improvement on the roughly 2% organic growth the company reported in the last couple of quarters. Expanding in premium coffee seems to be a reasonable way to achieve that, as we think innovation opportunities are more plentiful in the premium segment, which could drive stronger price/mix, something that Nestle has clearly been lacking in recent quarters.
By our estimates, the assets that Nestle is acquiring for $7.15 billion generate sales of around $2 billion and an EBITDA margin of roughly 24%, slightly below that of Nestle's existing coffee business. Opportunities for cost synergies, however, appear limited because the agreement appears to be around marketing and innovation strategies only, and does not involve the transfer of fixed assets. We are somewhat concerned that shelf space gains will come at the cost of some cannibalisation of Nespresso and Nestle Dolce Gusto, but we anticipate that stronger price/mix will drive faster growth in premium versus mainstream price segments.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Philip Gorham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.