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Nestle's Response to Activist Investors Underwhelms

We think it will take a lot more than a buyback to fix the packaged food giant.

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 Nestle (NSRGY) may have woken up, but we are not convinced the company has smelled the coffee with regard to the actions it needs to take to reignite growth in the increasingly competitive packaged food industry. We think our assumptions around the company’s algorithm are appropriate, and we are reiterating our $81/CHF 79 fair value estimate. While it is possible that the company’s announced measures will succeed in reaccelerating growth, we think the changes Nestle has revealed fall short of what we think is required to maximize the value-creation opportunity that this wide-moat firm offers. We believe it will take significant cultural change at Nestle for the company to realize its full potential.

Nestle has announced some tweaks to internal capital allocation as well as a CHF 20 billion buyback program. In our opinion, this is an underwhelming package designed to stave off activist interest in the company following Third Point Capital’s recent investment and demands for strategic change. Management said it intends to funnel more capital to higher-growth opportunities and cited bottled water, pet care, infant formula, and coffee as categories of focus. The company will look for opportunities for “targeted efficiency programs” that will not impede growth. Externally, it said, capital will be allocated to acquisitions that offer growth opportunities in its focus product categories and geographies.

Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.