EuroStoxx50 Analysis: Danone

Danone was founded by Isaac Carasso in Barcelona in 1919.In the 1950s, they used this amazing truck.Danone was founded by Isaac Carasso in Barcelona in 1919.In the 1950s, they used this amazing truck.

Danone is a French food and agriculture company, headquartered in Paris. It has four business divisions: (i) Fresh dairy products (49% ventas), (ii) Waters (23%), (iii) Early Life Nutrition(21%) and (iv) Medical Nutrition (7%).

It’s a world leader in Dairy Products (11.1 billion euros), number two in the world in Early Life and Waters (4.4 and 4.2 billion euros respectively) and leader in Europe in Medical Nutrition (1.4 billion euros).

Its sales are split geographically as follows: (i) Europe (40% of sales), (ii) ALMA (Asia-Pacific, LatAm, Middle East and Africa 39%) and (iii) US and Canada (21%).

 

Strategy and Outlook

Danone’s strategy is based on four pillars: (i) manufacturing products which are focused on Health and Wellbeing, (ii) developing strong brands (iii) diversifying geographically across developed and emerging countries, with the priority on the latter and (iv) betting on R&D.

On June 14, Danone announced an upward revision to estimates for its operating margin for this year, quantifying it at between 50 and 60 bps (compared with its previous forecast for a “solid improvement”). It also said it would make an adjustment in the pace of its investments in certain emerging markets (in particular in China). Furthermore, the company confirmed that it hopes to increase revenues this year by between 3 and 5% (vs 4.2% consensus) and maintained its long term objective for “strong, profitable and sustainable growth.”

The company also said it expects an improvement in sales’ organic growth in Q2’16.

 

Latest results

The company presents its results every six months, and only reveals sales figures on a quarterly basis. Net profit stood at 1.398 billion euros in 2015 (up 11.4% vs 2014 in absolute terms and up 7.4% in comparative terms). Operating profit grew 8.7% to 2.210 billion euros (vs the 8.8% consensus rise). Operating margin was 12.91% (in line with consensus), and representing a 32 bp increase from 2014.

By geographical regions, the operating margin in Europe improved (up 168 bp to 17.26%), while it fell in both North America (-19 bp to 8.67%) and the emerging countries (-120 bp to 10.71%).

Sales grew 6% in absolute terms and 4.4% in comparative terms to 22.412 billion euros.

By business divisions, Dairy Products did well (up 2.6% vs the 2% expected and 0.6% in Q3’15). The performance from the Waters’ divisions was more muted (up 1.9% vs the 4.6% expected and 6.8% in Q3’15).

On April 19, the company presented its Q1’16 sales. These stood at 5.305 billion euros, a fall of 3% vs Q1’15 and vs a drop of 2.7% expected by consensus. Without taking into account the currency effect, comparative sales showed a 3.5% increase (vs the 3.2% expected by the market).

We would highlight the 4.7% drop in fresh products’ sales to March (up 2.3% on a comparative basis), while the waters division saw a 4.2% decline in sales (vs a 3.9% rise in comparative terms). The Early Life Nutrition division saw an 0.5% rise (vs a 4.8% rise in comparative terms), while Medical Nutrition posted a 1.1% increase (vs a 6.6 rise in comparative terms).

 

Conclusion

Danone’s business model is based on strongly differentiating its product, which allows it to maintain a good negotiating position with distributors. Its strategy is also clearly focused on its health division, which has good growth prospects. Furthermore, the company has high exposure to countries with ample growth potential.

In financial terms, Danone’s net debt stood at 7.799 billion euros at end-2015, implying a ratio of 2.1X ND/EBITDA’15, while its stock market performance has been better than its peers over the year (-0.9% vs -4.64% Stoxx 600 Food and Drinks and vs -13.6% ES50). It is trading at a slight discount to its peers (21.1x PER’16e vs 22.6x PER’16e).  If we add to this its clearly defensive profile, we consider it as a safe haven stock worth investing in.