Morningstar | BN Updated Forecasts and Estimates from 07 Jun 2019
Danone's advantaged exposure in categories (yogurt, plant-based products, specialised nutrition, water) that are in sync with the latest consumer trends (health and wellness) gives it a head start on many of its peers that are still striving to optimise their brand portfolio. Given its entrenched supply chain position, pricing power in specialised nutrition (29% of sales), and a durable cost edge, we believe the firm is poised to meet changing consumer demands while generating healthy returns. This is evident in Danone’s value contribution (pricing/mix), which has been the main driver of organic growth since 2014 and reflects the strength of its water and nutrition businesses that has offset weak fresh dairy volume.Against secular (higher competition from small brands, changing consumer shopping habits) and cyclical (inflation) headwinds, most large consumer product companies are struggling to reinvigorate ailing brands and categories while cutting costs to fund growth investments. Consequently, unlike Danone, their organic growth has been driven more by volume and less by pricing/mix lately, with mix playing a key role for companies that can take advantage of premiumisation trends.A critical aspect of consumer product companies’ moats is an ability to deploy their deeply grounded supply and distribution networks to market products adapted to local tastes. Danone is no exception. After the 2017 WhiteWave acquisition, the firm planned to invigorate its infirm dairy business and complement its offering with innovative plant-based alternatives, which are still growing in the high single digits.Danone’s latest EUR 1 billion cost-saving plan is a double-edge sword, in our opinion. While higher profitability (at least 16% operating margin by fiscal 2020, from 14.3% in 2017) should drive free cash flow generation and possibly higher payouts to shareholders, there is always the risk of value destruction if management uses excess capital to fund costly acquisitions to support growth, a practice that is still fresh in the memories of Danone investors.Danone is engaged in activities in the global food and beverages industry. Co. operates in four markets: Fresh Dairy Products (Co. produces and sells yogurts, fermented dairy products and other fresh dairy products); Waters (Co. produces and sells natural waters as well as flavored and vitamin-enriched waters products); Early Life Nutrition (Co. produces baby formula, milk-and fruit-based desserts, cereals, small pots of baby food and ready-made baby food); and Medical Nutrition (Co. develops adult and pediatric clinical nutrition products to be taken orally, or through a catheter in the event of malnutrition related to illness or other causes).
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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