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Time to invest in Danone shares?

Danone is a French multinational food-products corporation based in Paris. It has four business lines: Fresh Dairy products, Waters, Early Life Nutrition and Medical Nutrition. The company is listed on Euronext Paris and on the OTCQX market via an ADR (American Depository Receipt) program.

We recently added Danone to our equity list with a price target of €72/share (16% upside). I think it is important that we also add defensive stocks to the list. Although we are pushing cyclical stocks, I think it also makes sense to have some defensive names in order to mitigate risk in a portfolio. Danone currently has a beta of 0.85, as opposed to many high beta names in the portfolio.

We were always interested in Danone but always considered the shares expensive. However, we now consider the current price as an attractive entry point. Shares have underperformed the index in 2017 mainly due to the company issuing a profit warning late in 2016. However, with the positive economic data coming out across the board, things are bound to improve. Also the company has other initiatives (including a cost cutting exercise etc as discussed below) in order to improve margins going forward.

We believe Danone is well positioned to see margin growth in years ahead. We see a margin recovery emerging, spread over many years, supported by margin-enhancing growth in waters and baby food over the medium term, and European dairy margins.

Investment rationale

* Sales growth - Danone operates in growth categories and focused its presentation on its growth in the US, growth many of its peers lack

* EPS growth - It is in a transformation phase, having announced management restructuring along with its FY results earlier this month, when it committed to consistent EPS growth through 2020

* Cost cutting - Danone has a cost cutting program underway. Called Program PROTEIN, the aim is to eliminate €1bn of indirect costs, i.e. from €8bn to €7bn by 2020

* Growth in the US - Danone currently generates $3bn of sales in the US. It was keen to emphasize that it expected growth in this market

* Dividends – Trading on a dividend yield of 3% and dividends per share expected to increase going forward

* Operating margins – expected to increase from 13.8% in 2016 to 14%, 14.8% and 15.3% in 2017, 2018 and 2019 respectively

The world economy seems to be recovering steadily. Expectations of economic growth often accompanied by higher interest rate expectations are having a twofold impact on equity valuations. The twin effect; an expected earnings increases from higher economic growth and the expected rotation from fixed income to equities as a result of higher interest rates, is dramatic.

We expect 2017 to continue to be positive for European Equities. Still, in the short term, elections in the Netherlands and France and the start of Brexit negotiations may increase short-term market volatility.

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. 

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