Category dynamics and execution challenges at Danone suggest LFL growth will remain weak near-term. However, structural growth opportunities in Baby and Water remain attractive and adding WWAVE and “Protein” to the mix should help Danone deliver peer leading LFL, margin and earnings growth F18-20e
What is the upside? The bear case is compelling: challenges in “old” Danone (execution issues in Dairy, regulation in China Baby, destocking in China Water plus input cost pressure) added to challenges in “new Danone” (deteriorating topline, organisational disruption and execution issues).
New Levers …the bear case is easy to make with challenges in “old” Danone and challenges in “new”,and feedback from investors remains consistently negative. However, we point to 3new levers: S&S, Protein,and WWAVE and ask what is the upside? Our bull case points to the most significant potential upside in our Staples universe +70% and +31% on our base case (just -15% on our bear case).
Structural+ Strategic …The Baby (ELN) and Waters sectors remain structurally attractive in our view. Add the Protein plan to the mix, the pressure to execute, plus WWAVE, plus strategic optionality,and we see a compelling case. The stock is very close to the classic combination of trough LFL, trough EBIT, trough margins and trough multiple … 16.5x ‘18e “old”, ~14x “new” combined.
Protein … We expect Danone to deliver peer leading LFL, margin and earnings growth FY18-20e. We estimate 3-5% LFLgrowth, with ~450bps of margin flexibility through 2017-20e for “old” Danone and even assuming low restructuring costs and modest re-investments, we expect Danone to deliver ~100bps margin improvement 2018-20e and ~40bps margin improvement in 2017e despite the input costheadwinds. …and WWAVE increasingthegrowth profile of thegroup. We believe as a standalone business, WWAVE can sustain a ~7% organic sales CAGR during 2016- 20e, with MSD-HSD growth continuing through 2020 – driven by increased penetration in core categories and accelerated growth in adjacencies (e.g. protein powder,yogurts,growing 13-14%). Although the company has generally lagged its categories in recent months, we believe these issues are largely related to correctable execution issues and/or organizational disruption associated with the announcement of the pending Danone acquisition.