Company's Overview Danone is the world's sixth largest consumer sector company by size. It operates in four categories: (i) Dairy (58% of sales'11), (ii) Waters (17% of sales'11), (iii) Child nutrition (19% of sales'11), and (iv) Medical Nutrition (6% of sales'11). The Group is a world leader in dairy products, number two in bottled water and [...]
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Company's Overview Danone is the world's sixth largest consumer sector company by size. It operates in four categories: (i) Dairy (58% of sales'11), (ii) Waters (17% of sales'11), (iii) Child nutrition (19% of sales'11), and (iv) Medical Nutrition (6% of sales'11). The Group is a world leader in dairy products, number two in bottled water and baby food and number three in medical nutrition. Geographically Danone is in: (i) Europe (56% of sales'11), (ii) Asia (15% of sales'11) and (iii) the Rest of World (29% of sales'11).
Strategy In February 2008, Danone began a restructuring process in order to focus on high-growth categories, and for that it needed to divest the business of pasta and prepared foods, glass, beer, cheeses and sauces. The strategy of the “new” company focuses on: (i) products aimed at Health and Welfare, (ii) development of strong brands (Blockbusters), (iii) geographic diversification between developed and emerging (key point of its strategy ) and (iv) commitment to innovation. Like all big multinational companies, Danone is fueling its growth in emerging markets (Mexico, China, Indonesia, Russia and Brazil). This expansion is being carried out through joint ventures and mergers, as the one in 2010 with the Russian company Unimilk to merge the dairy business in Russia and other regions of the former USSR.
Latest results The company presents results every six months. Quarterly we only know about sales figures. Last February 15th the firm presented its results for 2011, which were slightly above what the market consensus expected. By divisions we highlight its sales strenght in the water division (above 15% growth compared to 2010 sales). Geographically, the highest growth was the Asia division which grew 20% vs. 2010.
Moreover, the company presented its sales results for the first trimester of 2012 on April 17th. They were above forecasts, with an over 7% growth compared to a year earlier, which
is explained both by higher prices and for higher volumes, the good performance of the water division being a positive surprise, especially in emerging markets.
Company's outlook In the 1T'12 sales presentation Danone reiterated its targets for 2012, noting its focus on sales growth between 5% and 7% with stable EBITDA margins (18% in 2011). However, on June 19th, Danone announced a reduction in EBITDA margin goals of -50 basic points, bringing the margin expected at 17.5% (against an original target of the company to keep it stable at 18%). This reduction in operating margin is justified by the expected decline in sales in southern Europe, which has led the company to change its discount policy to support sales, and the considerable increase in the price of raw materials above what the company expected. However, Danone maintained its sales growth target in the range 5% -7%, a goal that we see easily mety by the end of 2012, offsetting the potential fall in sales in Spain and other southern European countries with an increase in Russia and the U.S., thanks to increased market share in both countries.
Conclusion The Danone business model is based on a high product differentiation, which allows it to maintain a strong bargaining position against distributors. Also its strategic policy is clearly focused on the health segment, which has some strong growth prospects. Besides, the company's heavily exposed to emerging markets, which we think could be increased, as in August 2011 the company signaled its intention to strengthen its presence in India through the acquisition of a child nutrition and medical nutrition business.
Its low beta and its clearly defensive profile leads us to consider Danone a safe haven in which to be invested at the current market turmoil. Although it currently trades at ratios similar to those in the sector (15.27 x PER'13 (e) vs 15.31 x PER'13 (e)), we prefer Danone to Unilever or Nestlé for its global leadership position in dairy and heavy exposure to the business of infant food, which could increase with the acquisition of the Pfizer child nutrition division (currently owned by Nestlé).
