Highlights of the Week of February 16, 2015

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of February 16, 2015:

• Nestlé Full Year 2014 results.
• The Greek debt crisis.

NESTLÉ GLOBAL FULL YEAR 2014 RESULTS:

ABOUT NESTLÉ:
Nestlé S.A. (SIX: NESN) is a Swiss multinational food and beverage company headquartered in Vevey, Switzerland. It is the largest food company in the world measured by revenues.

The company’s products include; baby food, bottled water, breakfast cereals, coffee and tea, confectionery, dairy products, ice cream, frozen food, pet foods, and snacks.

• Twenty-nine of Nestlé’s brands have annual sales of over one billion Swiss Francs (CHF) (about US$1.1 billion).
• Nestlé has 447 factories, operates in 194 countries, and employs around 333,000 people.

FULL YEAR 2014 FINANCIAL REPORT:
In 2014 Nestlé’s organic growth was 4.5%, composed of 2.3% real internal growth and 2.2% pricing. Sales were CHF 91.6 billion, down 0.6%, impacted by negative foreign exchange of -5.5%. Acquisitions, net of divestitures, added 0.4% to sales.

• The Group’s trading operating profit was CHF 14.0 billion, representing a margin of 15.3%, up 10 basis points, and up 30 basis points in constant currencies.
• The cost of goods sold fell by 30 basis points as a percentage of sales, driven by product mix and pricing actions and savings created by Nestlé Continuous Excellence which more than offset increases in raw material costs.
• Distribution costs were up by 10 basis points.
• Total marketing and administration expenses rose by 10 basis points as they increased consumer facing marketing support for their brands.
• Net profit rose CHF 4.4 billion to CHF 14.5 billion. The increase also reflects the profit realised on the disposal of part of the stake in L’Oréal and the revaluation gain on the 50% of Galderma already held when the Group brought its ownership from 50% to 100%. Reported earnings per share were CHF 4.54, up 44.6%.
• Board of directors declared a dividend of CHF 2.20  per share payable on April 22, 2015, to shareholders on record on April 22, 2015.

In below table Nestlé’s Full-year 2014, sales and trading operating profit margins are outlined:

Source:

THE GREEK DEBT CRISIS:
The Greek government-debt crisis was directly caused locally in Greece by a combination of structural weaknesses of the Greek economy along with a decade long pre-existence of overly high structural deficits and debt-to-GDP levels on public accounts.

Greece has been living for decades far above its means, and has financed this by borrowing money on the Global Capital Markets.

As a consequence of this Greece Debt-to-GDP ratio has ballooned to 175%.

Below chart shows Greece debt to GDP ratio compared with the other Euro-zone countries since 1977.

Last Friday, February 20, the Euro-zone gave Greece a four-month extension to negotiate new bailout terms. Greece was hoping for six months but settled for four. The deal temporarily stemmed a run on the country’s banks and calmed financial markets.

Under the agreement, Greece has to present a list of budget cuts and economic overhauls on Monday, February 23 that need to satisfy European officials. Once those measures have been implemented, Athens will receive more money to keep it afloat.

PGM CAPITAL COMMENTS:

Nestlé:
Below chart shows the 17-year chart of Nestlé, in which we can see that the company’s stock has appreciated form US$ 10.85 a share in November 1996 to US$ 76.62 a share last Friday, February 20, 2015, which is an increase of approx. 606 percent in 17 years.

Based on the CHF 2.20 a share dividend declared by the board of directors last Thursday February 19th, the company’s shares have a yield of 3.06%.

Based on the above, the company’s fundamentals and balance sheet we have a BUY rating on the shares of the Nestlé.

The Greek Tragedy:
Greece has lived for over 40 years far above its means and is hopelessly insolvent and can never compete economically as long as it is tethered to the single European currency (the Euro).

The Greek Economy within the Euro can never compete with the northern Euro-zone countries like Germany and Holland, which means that Greece can never flourish economically within the European Union and the four month life-line it received this week won’t change that.

Due to this it will be for the Germans and in some extent the Dutch to decide if they want to keep Greece and other weak southern European countries such as Spain, Portugal and Italy inside the Euro-zone to keep buying Germans & Dutch exports with Euros.

Due to this we believe that four months extension will go into history as a farce and that four months from now, this farce will be repeated and another deal will be cut. In the meantime, Greece will remain in what amounts to a depression and an entire generation of its young people will seek opportunities abroad.

In the meantime the BBC has reported that the wealthy Greek population is accumulating Gold as a protection against the chance of Greece leaving the Euro-zone and return to the Drachma, which will depreciate immediately against the Euro and other major world currencies.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Eric Panneflek