Readers know that my focus as a European is of course also on European companies. I am convinced that there are European champions that are largely unknown, but nevertheless promise long-term growth for investors. Foreign investors, who have a negative attitude towards investments abroad, should furthermore rethink about their “home bias”. This bias strongly influences investment decisions even when greater diversification outside of domestic markets might yield greater profits and lessen risk. But in order to invest in companies and global champions such as Royal Dutch Shell (RDS.A)(RDS.B), Unilever (UL, UN) or Anheuser-Busch InBev (BUD), investors often have to leave their home market and invest abroad. Tax aspects associated with this should therefore not lead to the exclusion of such investments.
Conversely, there are also companies that do not really stand out from other American companies. They may be worth an investment, but are not necessarily a jewel. One such company is the consumer brands Danone (OTCQX:DANOY) (OTCQX:GPDNF). Although it is one of the defensive companies that can provide the anchor of a broadly diversified retirement portfolio at any time, it is still not a must have company.
It is astonishing how little the company is covered by analysts at Seeking Alpha. Maybe it’s because the focus is more on US-American. That’s a pity, because basically the company has its own role in the concert of the big ones.
(Source: The illusion of choice)
Its brands for drinks, yogurts and baby food are very well known:
(Source: The illusion of choice)
But it could also be because the company has simply not been a good performer in recent years. Understandably, there is also little reason for investors to invest in Danone if they could have made a multiple profit at the same time as the S&P 500:
It is well known that consumer goods companies have not necessarily performed as well as the market in recent years. But Danone has also under performed within its peer group. No matter if you look back 1 year, 3 years, 5 years or 10 years, Danone was at best mediocre. If one had invested in Danone ten years ago, the company would have achieved an annual growth rate of only 3 percent minus inflation, excluding dividends:
So here are a few facts about the company: Danone is a multinational food and beverage group with headquarters in Paris. The company refers to about 90 percent of all products as “Healthy products”. Thus the company refers to products to water, yogurts, milks and other daily dairy products, beverages with 0% sugar, early life nutrition products (except biscuits and beverages for children under 3 years old) and medical nutrition. The remaining categories are mainly low sugar beverages and indulgent products. The company makes every effort to act sustainably with regard to nature, environment and people, e.g. by now, 87 percent of its packaging material is recyclable, reusable or compostable. Danone operates in three business areas.
The EDP and Specialized Nutrition segments are the largest sales drivers. The latter segment in particular is also recording the highest growth, whereas the EDP segment did not grow at all last year:
(Source: FY 2018 report)
However, Danone has very strong market positions within the individual segments:
(Source: Danone webpage)
Danone is doing quite a lot to achieve further growth. Accordingly, the company has expanded its portfolio to include animal-free dairy products in order to be able to compete in the market. To this end, Danone acquired smaller specialized companies such as White Wave Foods. White Wave Foods includes brands such as soy-based Alpro and the organic brand Provamel. Last year, Danone also launched its first soy-based probiotic yogurt. These developments are basically reasonable, because that’s exactly what consumers are tending towards nowadays. The vegan target group is also generally very affluent, quality-conscious and loyal to the brand.
In addition, the company convinces through strong growth in Asia, especially in China. This is especially true for the Specialized Nutrition segment:
(Source: 3Q 2019 results)
In the words of the CFO Cécile Cabanis:
So as you’ve seen, a spectacular [3Q 2019] close to double digit, 9.8%. Exactly 1 year ago, I was outlining the new IMF category dynamics in China; and the expectation for our business to go through 4 volatile and difficult quarters before starting to grow strongly again, which has materialized. If we go through the number by segment in more details: Advanced Medical Nutrition delivered another very good quarter, with sales up mid-single digit led by the pediatric segment and growth that was again double digit in China and solid in Europe. Early Life Nutrition sales have grown more than 10% this quarter. The key region of accelerated growth was, as expected, China, which was up more than 20%. Rest of the world posted another solid quarter with Americas growing strongly; Europe that improved, driven in particular by the U.K. on a low base, if you remember, last year. The rest of Asia posted strong growth, including market share gain and further expansion in Southeast Asia.
However, this great development is being cancelled out again by the weak performance of the other segments:
(Source: 3Q 2019 results)
On the other hand, Danone pays a nice dividend and achieved to keep the payouts at least stable during the great recession:
(Source: Dividend history)
Given that, the growth rates are not really impressive though. Furthermore, the company is not really suitable for dividend investors either, as it does not regularly increase its dividends.
So you can already see with this micro-view that there is a lot of light and shadow. But I do not see a real unique characteristic or an insurmountable moat. And this is certainly a problem for many investors, as there is a wide range of investment opportunities available in the food and consumer business sector. Additionally, if you look at the fundamental comparison with competitors that I have compiled below, the arguments for investing in Danone at this point in time fade away. I used the following companies for the comparison:
The results are as follows:
To address the biggest problem here right ahead: It is of course difficult to find one hundred percent suitable competitors for these large companies, as some products overlap in part, while other products do not overlap at all. I know that issue. Nevertheless, I am convinced that such overviews are important, both from a micro and a macro perspective. For all these companies operate in a defensive sector for consumer products. It is more or less about products that are in demand on a regular, if not daily basis, and here mainly food producers. Such overviews provide investors with an overview of the current market situation and a guide to the stage the market is at. We see here, for example, that the companies are certainly highly valued, but that their growth is relatively weak in terms of EBITDA growth. Conversely, such an overview also gives us a micro-view of individual companies. For example, it is interesting to see that Coca-Cola is still able to maintain an extremely high margin despite operational weaknesses. So when it comes to Danone, the following is striking. There is hardly an area where Danone really stands out. It is interesting that the above picture is also confirmed here. Danone is a stable company, but not a jewel. Rather, the very low margin is striking. In addition, the very high debt / free cash flow ratio bothers me.
After every analysis of a company, I will use a three-grade rating for this series. Its purpose is to ensure that readers recognize at first glance whether a company might or might not be worth investing. The three steps rating at a glance.
Buy the jewel now rather than tomorrow if:
- There are no downsides and the company has growth potential.*
- The upsides outweigh the downsides and the company has enormous growth potential.
Worth an investment (maybe later after a second look) if:
- The upsides outweigh the downsides.
- The upsides are equal to downsides but the company has growth potential.
No thanks if:
- No growth potential in the long term.
- The downsides outweigh the upsides.
*Of course, the growth potential is a part of the upsides, but it is also crucial in my final considerations.
Conclusion: The grade for Danone
Overall, Danone is a great company that offers products for nutrition and health conscious people and has a strong position in the market. It also invests heavily in the Asian market. It is in principle suitable for a broadly diversified retirement portfolio. However, Danone is not a must buy, and certainly not a jewel that you absolutely have to buy now. The are the reasons for my grading:
- There is a lot of light and shadow.
- High debt / free cash flow ratio.
- Dividend not increased several times in the last decade, thus low dividend growth during this long bull market.
- Low margin.
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Disclosure: I am/we are long BUD, RDS.A. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.