Danone Lacks Clarity in Guidance

Stock Price : €37,4 ($52.90 USD)
Conclusion: Lack of clarity in the guidance. We thought that the stock was fully priced before the rights issue, it is still the case following H1 results.

H1 sales up 1.6% like for like, down 2.2% reported. Net income up 7.6% like for like, 3% reported. Management confirmed guidance of sales growth “a few points” below the medium term target of +8-10% and +10% growth in EPS.

Based on our full year forecast (like for like growth of 3.6%, implying +5.6% in H2), we feel that the wording of the guidance could have been changed from “a few points” to “well below”…
As to the EPS guidance, although we understand the measure at constant scope of consolidation and constant exchange rates, we wonder why it is excluding the effect of the rights issue, which makes it almost meaningless for the shareholder.
The fact is our EPS forecasts for 2009 and 2010 are respectively 10% and 14% lower than our March estimates.

Fundamentally, we believe that the mid term guidance of 8-10% revenue growth is too high in light of the durable pricing pressure in the dairy business and volumes decline in water in developed markets. In addition, the recent pricing pressure in Germany indicates that the highly profitable medical nutrition business is not immune to the economic crisis.

In conclusion, at a time when consumers are less willing to pay a premium for health benefits, Danone offers a medium term growth scenario of +5-6% in sales and +9-10% increase in earnings.

The stock which was fully priced before the rights issue is down 13% YTD. Danone still trades at 14.7x 2009 and 13.6x 2010, which implies a 12% premium versus Nestle (NSRGY.PK) adjusted for Alcon (13.1x-12.3x). Our long term DCF based valuation suggests no significant upside.

Disclosure: No position