Swiss food giant Nestle (OTCBB:NSRGY) has a well-earned reputation for excellence, and the Street has long been happy to pay a premium for that performance. That's all well and good for those who own shares, but it makes waiting around for an opportunity to buy a bit frustrating. With the stock still trading at a hefty premium, investors can find better deals in the food sector.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

First Quarter Results Slightly Ahead of Target
Nestle reported somewhat encouraging numbers with its truncated first quarter report. Like many European companies, Nestle offered up only information on sales, and little else.

Internal sales rose more than 7%, about a half-point above sell side expectations. This growth was comprised of over 4% price growth and just under 3% volume growth. More interesting, emerging market sales rose about 13%, while sales to developed markets rose just around 3%.

SEE: Strategies For Quarterly Earnings Season

Breaking Down By Segments
Nestle's nutrition business saw nearly 6% organic growth. That's inferior to Abbott's (NYSE:ABT) first quarter nutrition numbers, while Mead Johnson (NYSE:MJN) has yet to report. The company noted that weight management was a weak area.

Nestle Waters grew nicely (up 8%), but seemed to lag Coca-Cola's (NYSE:KO) first quarter performance. Comparisons in other categories like packaged food are not very relevant at this point in the earnings cycle, as comparable companies have yet to report in most cases.

Paying a Big Price For Pfizer's Nutrition
On Monday, the results of Pfizer's (NYSE:PFE) sale of its nutrition business were announced, and Nestle was the winner. Nestle will pay nearly $12 billion for Pfizer's nutrition business - a business with single-digit share of the global baby food business, but a stronger position in China.

Nestle is paying roughly a premium of 20 times EBITDA for this business - well above what it paid for Gerber (15.7 times) and the Novartis (NYSE:NVS) nutrition business (17.5 times). These are lucrative businesses with wide moats, though, and Nestle's prior acquisitions have arguably proven to be worth the premiums. Moreover, while Nestle is one of the world's largest players in infant nutrition worldwide, they've had less success penetrating the Chinese market.

SEE: A Clear Look At EBITDA

The Bottom Line
Nestle has a lot to support its valuation. Not only does the company hold top share in many of its addressed markets, but it also is one of the most successful companies at penetrating emerging markets (with roughly one-third of its sales coming from developing economies). Better still, the company constantly innovates and refreshes its line-up, while also delivering some of the best returns in the sector.

All of that is great, but does not mean that investors should pay just any price. Even with strong ongoing growth, it's difficult to push fair value on Nestle shares north of $60, making it look quite expensive today on both a relative and absolute basis. While Nestle would be high on my list of companies to buy if they got cheap, even the best companies can be bad stocks when bought too early.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  2. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  3. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  4. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  5. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  6. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  7. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  8. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  9. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  10. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center