Stock price: €41.90 ($ 56.82 USD)
Conclusion: Back to growth but not at the EPS level… We raise our valuation range up to €45-€47 per share to account for improved cash generation. Nonetheless, Danone remains expensive vs. its peers and offers lower near term upside potential.
2009 results: In line with expectations. Sales down 1.6% reported to €15bn (+3.2% organic)-Net earnings +11% to €1412m, EPS down 3% to €2.57. Guidance 2010: sales growth above 5%, stable margin.
We might have to wait until 2011 to see a return to EPS growth
- Top line growth is back but at a huge cost. Sales in Q4 rose by 5.5% (+3.2% full year) with pricing down 3.4%. The dairy division recorded -5.3% value impact in Q4. According to Danone, consumption in 2010 should not rebound and one might see even more pressure. Danone forecasts another negative pricing impact of -2-3% in H1 this year, only partly offset by positive mix impact in H2. Management implied that we will have to wait until next year to return to positive pricing territory.
- 2010 headwinds. First, margins in dairy (up 30bp in 2009) will be under pressure due to continuing pricing decreases in H1, at a time when milk costs are expected to bounce back (+5-7%). We forecast input costs impact to turn negative this year (-70bp vs. +250bp excluding productivity gains last year). Second, Danone said that the geographic diversification in baby and medical should impact the margins by around 10bp. Last, notwithstanding a 35bp gain in “underlying” margins in water last year, Danone’s track record on the reported front (margins which drive EPS declined for the third consecutive year) leads us to remain cautious for 2010.
- We feel more confident on the financial expenses side. Net debt went down by €4.6bn last year to €5.7bn (1.9xEBITDA). In addition to the capital issue, Danone increased FCF by more than 20% to €1.3bn. We project +18% increase this year to €1.53bn, driven by further improvement in working capital inflow, notably for baby food and medical.
However, EPS could remain stable (around €2.55), impacted by the higher number of shares.
Our DCF model leads to €47 per share. However, the comparison with its peers shows that Danone continues to trade at a premium (16.4x P/E and 10.5xEV/EBITDA based on 2010 estimates). We have preferred Nestle (OTCPK:NSRGY) in the last year, and today’s presentation leads us to maintain our view.
Disclosure: no position.