Nestle (OTC:NSRGY) has trained investors and analysts to expect a high level of performance, so although the company had one of the best financial reports of the food sector in the fourth quarter, the overall reaction hasn't been too positive. While Nestle is absolutely one of the best-positioned companies for emerging market growth and one of the best-run companies in the world, today's valuation doesn't offer all that much upside.

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Final Results for 2012 Come in a Bit Light
Nestle reported organic growth of just over 5% for the final quarter of 2012, a very good result by the standard of the food sector, but about a half-point light of expectations. Nestle saw both solid price performance (up 1.6%) and good volume (3.6%). While European sales growth was modest at under 2%, it was better than expected. Conversely, the growth in "AOA" (Asia, Oceania, Africa) was nearly 6%, but a little light of expectations.

Nestle doesn't report quarterly earnings like American companies, but second half operating profits improved about 17% from the prior year's level and the margin improved more than half a point. That said, the company's overall margin performance was a little short of expectations.

With the Pfizer Deal Done, Time to Leverage It
Nestle paid a steep price to get Pfizer's (NYSE:PFE) infant nutrition business (20 times EBITDA), but the deal gives the company over one-quarter of the global infant formula market and even stronger positioning in key emerging markets like China. As is true for Mead Johnson (NYSE:MJN), the key for Nestle will be increasing the penetration rate of packaged formula in major emerging markets like Brazil and India. Not only are there cultural factors at work, but economic factors as well - as time goes on, however, the increasing percentage of women in the workforce and the improving incomes in key emerging markets should support strong demand growth.

SEE: Don't Ignore These Emerging Markets

Leveraging Leading Brands Around the Globe
With Mondelez (Nasdaq:MDLZ) and Kraft (Nasdaq:KRFT) now split, the former becomes an interesting peer for Nestle. Both are brand leaders in several markets (chocolates, coffee, cereal, powdered beverages, etc.) and both focus primarily on food categories that are growing faster than the overall packaged food averages.

Both are also keenly leveraged to emerging markets, with more than 40% of their sales coming from these areas. That creates some intriguing growth potential for Nestle - it is a brand leader and a share gainer, its addressed categories are growing faster than the norm, and it has high levels of exposure to markets that are seeing greater population and per-capita income growth.

There is a down side to Nestle's growth potential, and that is margins. It takes a substantial amount of infrastructure to support a global food business, and Nestle often has to invest in production and distribution assets well ahead of its ability to fully leverage terms of revenue and volume.

Can Coffee Continue to Carry the Load?
Nestle has over 20 brands worth more than $1 billion in annual sales, but the company's coffee business carries above-average weight. Not only is coffee where Nestle holds its greatest global share (about 27%, more than double Mondelez, and well ahead of DE Master Blenders, Smucker (NYSE:SJM) and Green Mountain (Nasdaq:GMCR)), but it is also disproportionately profitable for Nestle.

The question is whether the company can keep this up. Nestle has done well with its Nespresso machine, but rivals like Starbucks (Nasdaq:SBUX) would certainly like a piece of that premium market. At the same time, the company has been relatively less aggressive in trying to build its share in the U.S., which may be a mistake, given the sheer size of the market.

SEE: Most Affordable Cups Of Coffee

The Bottom Line
Nestle is a pretty solid candidate to be a "hold forever" sort of stock. Unfortunately, this doesn't look like the greatest time to buy, given the stock's valuation. Even if Nestle can outgrow most of the packaged food sector, 6% annual compound free cash flow growth only supports a price target in the low-to-mid $60s. Given relatively modest near-term prospects for margin expansion, I'd wait in the hopes of getting Nestle cheaper at a later date.

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

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