Monday, November 6, 2017

A current AIM International Fund Holding: Danone SA ADR (DANOY) by Michael Dennsion

Danone SA ADR (DANOY, $16.24): “No Doubting Danone”
By: Michael Dennison, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


• Danone SA ADR is a multinational food and beverage company. DANOY is the world’s second largest dairy producer and third largest bottled water producer. Operating through its four segments of Fresh Dairy Products, Early Life Nutrition, Waters, and Medical Nutrition, the company collects sales across the globe. DANOY is located in Paris, France.

• After the purchase of WhiteWave Foods in July of 2016, DANOY is starting to see earnings accretion as it expands further into the U.S. organics market.

• The company recently undertook a €1.25 billion bond issue. Proceeds from the issue will be used to help refinance some of DANOY’s outstanding debt. The company will also be redeeming $500 million in WhiteWave Foods bonds due in 2022.

• WhiteWave Foods product sales saw a 17% jump in Q3 which helped push overall growth for the entire company up 4.7%.

• DANOY is encouraged by continued growth in China where the company’s Waters, Early Life Nutrition, and Medical Nutrition saw significant growth in Q3.

Key points: The purchase of WhiteWave Foods gave DANOY greater penetration into the U.S. market, a place that had previously been shrinking due to declines in consumer demand. The acquisition also gave the company a market leadership position in the organics food and beverage category, a segment predicted to grow by double digits in the coming years. Combining these two has given the company the extra “protein” it needed to push further growth.

A €1.25 billion dollar hybrid bond issue signals that DANOY is taking advantage of current economic conditions by paying down previous debt and driving further growth. The company believes that the issuance will help create a stronger capital structure for the firm, as well as aid in spurring better growth in its key markets of Europe and North America. DANOY has also redeemed a $500 million bond issuance from the acquisition of WhiteWave Foods in order to take advantage of favorable market conditions at the present moment. 

Q3 was very kind to the company as emerging market growth shone the brightest. The markets outside Europe and North America experienced YoY 11.1% during the quarter with China being a particularly bright spot. Europe remained weak with consumer demand for yogurt. Sales in North America were strong; however, the company pointed to a deflationary environment in grocery stores as a source for concern.

China was the bright city on a hill in Q3 for DANOY. The company cites higher GDP growth, an expanding childhood population, and increased e-commerce as reasons for the growth. Specialized Nutrition and Waters were the biggest winners of growth.

What has the stock done lately?

Since being added to the AIM International Equity fund in April, 2017 the stock has only climbed higher; +15.3% during that time. YTD, the stock is even better, outpacing the broader market with a 30% increase. The approval of the WhiteWave acquisition in April has helped provide bettering sentiment on the long-term growth prospects of the company and consequently helped push shares steadily higher.

Past Year Performance: DANOY shares have increased 16.58% in value during the last year. During Q3 of 2016, shares surged after the announcement of the WhiteWave Foods acquisition; however, they declined thereafter due to market sentiment about the deal and whether it would face any antitrust pressure from European or American regulators.

Source: FactSet

My Takeaway
DANOY is a company primed for further growth. The company was able to get ahead of its larger food and beverage competitors with the purchase of WhiteWave Foods, which has secured its place as a market leader in the organics space. Continued expansion into China will also be a boon for the company as the country continues to grow its middle class and its GDP. Danone will also be carried into the future by its Waters Division. Growth in bottled water is expected to increase over the medium term as consumers continue to look for healthier alternatives to alcohol and soda. DANOY shareholders stand to profit from these encouraging macro trends as the stock is currently knocking on the door of its 52nd week and looking to surpass it.