Sanjay Bakshi: Note to Myself on The Maggi Problem
When a great business encounters a huge but solvable, one-time problem, it might be a good chance to buy its stock.
Does Nestle fall in that category? Maybe, maybe not. It’s too early to tell.
Buying the stock just because it has fallen post the news about alleged leaded Maggi, without any consideration for the potential impairment of earnings (and more importantly the company’s reputation and moat) would be faulty process, even if it results in a good outcome.
One needs to wait to find the truth. If Maggi is found to be contaminated, then one has to evaluate the impact on the company’s long-term earnings and reputation. The stock may have fallen but it’s P/E (based on normal earning power in the future) may have risen.
If Maggi is found to be not contaminated, then one should evaluate the attractiveness of the stock at the time, considering alternative opportunities.
In either case, it’s too early to jump and buy.
It takes 2 minutes to make a Maggi but it takes a lot longer to evaluate an investment opportunity.
5 June 2015