Quietly, some institutional investors have been moving to Europe. Not literally, but they have been shifting a lot of capital to European assets that have received little interest or attention in the last decade. Hedge funds have been looking to buy a bigger bulk of European equities at a time when Europe’s economic growth has improved from absolutely terrible to just slightly miserable.
That’s the context behind the recent headline that Third Point, Dan Loeb’s somewhat famous hedge fund, is putting $3.5 billion in Nestle (NSRGY), the Swiss-based global conglomerate food manufacturer that is famous in the west for its chocolate and in emerging markets for, well, just about everything. The economies of scale and carbohydrate-focus of most of Nestle’s products, as well as a long track record of tailoring products for local audiences, means that it has become a popular household staple in several emerging markets, which depend on Nestle for sugary and starchy products ranging from condensed milk to baby formula and beyond.
Its foreign exposure and international revenue streams have been one old bullish call on the company. The fact that it receives a growing share of revenue in emerging markets means that it is exposed to these currencies but also safer in the event of a eurozone meltdown or something crazy like a Swiss currency devaluation.
Nonetheless, this isn’t why Loeb is making the bet—or, if it is, it isn’t the reason he’s making public. Instead, Third Point told investors that Nestle is a business of outstanding quality with “many avenues for improvement.” Continuing, the hedge fund also said that Nestle stock has underperformed U.S. and European counterparts for the last decade, providing a rare opportunity for investors to buy low. “Despite having arguably the best positioned portfolio in the consumer packaged goods industry, Nestlé shares have significantly underperformed most of their U.S. and European consumer staples peers on a three year, five year, and ten year total shareholder return basis.”
This decade-long slump isn’t a matter of market inefficiency. Loeb doesn’t look for hidden value; he looks for firms that can and need to reform, and then buys a stake in the hopes of getting the clout to pressure them to make those changes. This has made Loeb a reviled and admired activist investor, with some claiming he takes his reform moves too far and others praising him for making astute changes to strong, viable, but mismanaged businesses. The market’s perception of Loeb’s view on Nestle remains unknown, but will probably be hashed out over the next few weeks.
Loeb’s plans for the company aren’t clear, but he did tell investors that management needs to address “the company’s stalled earnings”. Loeb hints that these changes may have more to do with restructuring the costs of business rather than pursing sales growth opportunities. “While Nestlé has stood still, its peers have pursued productivity increases aggressively and made other changes in order to deliver earnings growth and create shareholder value in a slower sales growth world,” he said.
Additionally, Loeb said Nestle could improve its margins by up to 4 percentage points with a margin target of 18%-20% by 2020. He also wants to see the company sell its L’Oreal stake and issue a share buyback program.
Keep in mind that Loeb has bought $3.5 billion of a $263.7 billion company. With just 1.3% of a firm under foot and a lack of assets under management to expand that too much, it is hard to determine how successful Loeb will be in realizing his financial dreams for the firm.
Loeb’s success in the past is hard to measure. He has made some progress with Honeywell International (HON), although his moves to restructure Yahoo (YHOO), while ultimately getting the results he wants, didn’t actually create as much shareholder value as one would hope.