Nestle SA (NESN:VX, 79.74) is under well-publicized attack by a U.S. activist fund. However, many of the proposals put forward, including selling marginal assets and having a stronger focus, are already underway, with stepped-up moves from the new CEO. Dan Loeb, however, wants a more radical transformation and faster progress.
In particular, he urges Nestle to sell its $32 billion stake in L'Oreal, which other investors agree does not fit the company. With that stock at a long-term high (and the yield down to 1.7%), now might be a good time to divest. Nestle does not particularly need the cash, however. Loeb also wants the company to change its organization and split into three units. Notably, he sent his second rather aggressive and very public memo after a set of good results and the stock had already moved up. We doubt the Swiss company will feel the need to comply with the micro-wishes of a U.S. investor holding 1.4% of its shares.
Transforming Portfolio
Recently, Nestle has divested some lower-margin divisions (including the U.S. chocolate unit) and has made several higher-margin acquisitions (and says it is on track for its 2020 margin target). CEO Mark Schneider said he expects to turn over 10% of the total portfolio by then. It is focusing on niche brands, including in nutrition, health and wellness.
The company has also instituted a major buy-back program, and added seven new independent directors over the past three years, answering another criticism. One recent purchase, the right to distribute Starbucks coffee in grocery stores, seemed very expensive at $7 billion, especially for a brand that may have peaked: Does anyone actually like their burnt coffee taste?
The stock, after being soft most of the year, shot up the last couple of weeks to a five-month high, putting the dividend just under 3% (after raising the dividend for 23rd straight year). We are holding here, and would look to a pullback to buy again.
Brighter Outlook Ahead
Kingsmen Creatives Ltd. (5MZ:SI, 0.54) has another set of disappointing results (for the period ending March 31), with profit down 63% on a revenue decline of 8%, albeit it from a good prior period. However, it is winning some good contracts, including one for the Singapore Formula One race, worth S$29 million. Trading at 10 times earnings, less than book, with a very strong balance sheet, and yielding 4.6%, Kingsmen is a buy for patient investors.
High Dividend Under Pressure
Hutchison Port Holdings Trust (HPHT:Singapore, 0.285) is under pressure from the widening tariff war and the impact that will have on trade, particularly between the U.S. and China, which forms the bulk of Hutchison's business. The distribution to unit holders is set to decline for the next couple of years, partly because of capital spending plans. But the yield—currently virtually 10%—will remain attractive, even after the anticipated reduction. Unfortunately, the main risks to the trust—notably on tariffs, and the threat to port rates—are more likely to hit the price of units immediately, whereas the potential upside—from a recovery in global trade and Hong Kong port redevelopment—will be slower to materialize.
The stock was particularly hit last month, when Morgan Stanley removed the trust from its main Singapore Index and moved it to the Singapore Small Cap Index, which has few international trackers.
We are holding, based on the low unit price and attractive yield, but will wait to see how the tariff war unfolds before buying more.
Undervalued Assets with Growth Ahead
Loews Corp. (L:NYSE, 48.90) continues to perform well, with its largest holding CNA Insurance doing particularly well, and the private hotel unit also showing strong growth. Loews has said it will buy the other half of Boardwalk Pipeline it doesn't already own, a $1.6 billion purchase. Recent changes in tax policy have reduced the benefits of master limited partnerships (which Boardwalk is), so Loews is exercising its right to acquire all shares.
The balance sheet is rock solid, with $4.9 billion in cash and investments at the parent level (before the Boardwalk acquisition), and $2.4 billion in long-term debt. It has been using some of this cash hoard to buy back shares, spending almost $1 billion for 5.5% of the shares outstanding over the past seven months.
Loews' assets are worth around $21 billion (most of that in publicly traded shares) against a market cap of less than $16 billion. One expects a holding company discount, but 30% is excessive. In addition, the company has growth potential, from CNA, the hotels (with new hotels under construction in Orlando), and exposure to any energy recovery (with Diamond Offshore as well as Boardwalk). For long-term investors, it can be bought here, though we may well see better opportunities in the months ahead.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Nestle, Kingsmen Creatives and Hutchison Port Holdings. I determined which companies would be included in this article based on my research and understanding of the sector.
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