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Nestle (PINK:NSRGY) Builds Momentum in China, $0.45 at a Time

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The government-mandated increase in China's minimum wage means a lot more people should be able to afford Nestle's low-cost consumer products.

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The problem, if you're an investor, is that this story isn't especially cheap. The stock currently sells for 17.2 times projected 2012 earnings per share. That's roughly a 5% premium to other global food companies.

Furthermore, the sector as a whole isn't known for rocketing growth rates. Nestle's projected 5.3% earnings growth leaves the stock with a PEG ratio (P/E to growth rate) of 3.23.

So let's be clear what you're buying for this price: best in class, stable, and predictable growth.

How predictable? From the third quarter of 2009 to the third quarter of 2010, a period when US GDP growth averaged a not-so-robust annual 2.5% a quarter, Nestle averaged organic growth of 4.6%, versus just 1.5% at peers Kraft Foods (NASDAQ:KFT) and Unilever (NYSE:UL), according to Credit Suisse.

What you think that kind of predictable growth is worth depends to a great degree on what you think the US and global economies will look like over the next 12 to 18 months. The more uncertain you think the growth picture is, the more Nestle shares will be worth to you.

I'm relatively pessimistic about 2013, because I think the chance of the US steering away from the fiscal cliff without damage is relatively small, because I don't see the current austerity plans in Europe producing significant growth in the eurozone, and because I think China's transition from a cheap-labor export economy will be long and wrenching.

No positions in stocks mentioned.
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