Nantonov Investment Themes is currently focused on investing in Danone, a global food and beverage company that operates in various regions around the world. Despite disappointing margins, Danone has some market-leading brands that provide great value to consumers’ lives and generate revenues worldwide. The company has traded at an average multiple over the past decade, which seems reasonable given its current position.
Danone is divided into three segments: essential dairy and plant-based, specialty nutrition, and water. The company has grown its revenue at a CAGR of 3%, reflecting a calm decade for the business. The company has diversified its revenue, with Europe remaining as its largest market, accounting for approximately 32% of revenues from this region.
Rising consumer awareness and demand for healthier food and beverage options have become a key trend in the industry, and Danone benefits from its deep expertise in this area. With the growing popularity of plant-based diets, Danone is aggressively expanding into this sub-sector, developing plant-based products comparable to its current offerings and acquiring market players.
Danone has demonstrated its commitment to sustainability through various initiatives, such as reducing packaging waste, improving water efficiency, and responsible sourcing. The company’s ESG commitments reflect its priorities towards environmental sustainability and healthy/plant-based food.
The current economic climate is dominated by inflationary pressures, with supply chain issues and other factors pushing most levels higher. Danone benefits greatly from consumers’ inelasticity, as they are unlikely to stop drinking water or feeding their children. Changes in volume are difficult because consumers are encouraged to choose cheaper products.
Danone’s declining margins are reflected in its efficiency metrics, with ROE dropping from a high of 19% to 6%. The company’s inventory turnover rate has declined, similar to CCC’s. This is unlikely to cause liquidity problems, but it will result in a cash drawdown. Danone’s current dividend payout ratio stands at 129% after a low net profit this year. The company has room to undertake further M&A when opportunities arise, as it has a ND to EBITDA ratio of 2.3x.
Overall, we rate Danone as a hold because it trades at fair value. The company has quality products, diversified revenue, and a commitment to sustainability, but we’re concerned about mediocre profit margins.