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About the Company
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.
Our Stance on Danone
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
Conclusion
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.
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