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Danone's guidance a 'curveball' at investor conference
By Barbara Kollmeyer, MarketWatch
Last Update: 5:59 AM ET Nov 19, 2009
MADRID (MarketWatch) -- Shares of French yogurt and dairy group Danone were down nearly 5% on Thursday after the company announced a cut in its guidance for organic-sales growth, the depth of which surprised some analysts.
Danone made the change after the close of markets in Paris on Wednesday and at the close of a two-day investor seminar in Amsterdam.
The company now sees organic growth of at least 5%, driven mostly by volume growth, against previous guidance of 8% to 10%.
In November 2008, Danone had cut its growth forecasts to "a few points below" its medium-term guidance of 8% to 10% growth.
"The world at large has gone, and is still going through, a profound transformational phase which will have a long-lasting impact on society and on consumer behavior in specific," said Emmanuel Faber, co-chief operating officer, in a statement.
Faber added that Danone's business model and leading market positions will still enable the company to deliver a "strong and sustainable long-term performance."
'After one and a half days of explaining the strong prospects for the business, management...'threw a curveball' in the final presentation."
Andrew Wood, Sanford C. Bernstein
But the deep cut in guidance and the timing, on the heels of such a bullish seminar conference, took brokers and analysts by surprise.
The shares were last down 1.6 euros to 40.92 in Paris on Thursday.
"After one and a half days of explaining the strong prospects for the business, management (to use a baseball term) 'threw a curveball' in the final presentation," said Andrew Wood, senior research analyst at Sanford C. Bernstein, who attended the Amsterdam conference.
"We believe that most analysts/investors were anticipating that Danone would reduce its medium-term top-line guidance ... so a reduction in guidance should not have come as a major surprise," said Wood, in a note to investors. "However, we believe that many were expecting management to guide [for growth in] the 6% to 8% range, not +5%...so this is likely to be a disappointment for the market."
Danone said it would continue to grow market share globally, but it gave no guidance on margin growth, whereas previously it guided on operating-profit growth greater than sales growth, said Bernstein.
The company sees annual free cash flow from operations reaching 2 billion euros by 2012.
For 2009, Danone affirmed objectives such as like-for-like sales growth of close to 4% in the second half of 2009, with comparable operating margins up 0.6 to 0.7 percentage point for the year. Underlying adjusted earnings per share are seen up 10%.
Saving the worst for last
Wood said management spent much of the Amsterdam seminar focusing on strength in its health and nutrition businesses, with management "highlighting the opportunities for category and geographic growth, including remaining bullish on medium-term prospects for water."
"Consequently, the downbeat guidance was perhaps even more disappointing," said Wood. "It suggested that Danone, as is typical in these types of seminars, was guilty of being too upbeat in the presentations, showing the good businesses and accentuating the positive, rather than giving a more balanced view of all of its businesses."
He said management's lower guidance was fashioned around concerns about elevated levels of public debt and high levels of taxation that will be needed to reduce that debt; still high unemployment, and expectations that stimulus plans will not continue into 2010.
Foreign-exchange headwinds could also continue to hit Danone, with little good news expected on commodities such as milk -- prices there are expected to rise in 2010 and beyond, he said.
Wood still has an outperform rating on Danone, with a 46-euro price target. He expects 6% organic growth in 2010, margin growth of 0.4 percentage point, and 1% earnings- per-share growth, saying he's not yet convinced these should be reduced, even after management's downbeat guidance.
But he said management is sending out mixed messages, something he's seen in past conferences as well: "We feel that management is being cautious in guidance, and possibly under-promising to potentially over-deliver, which in itself is not a bad strategy."
Warren Ackerman, analyst with Evolution Securities, rates Danone neutral with a 42-euro share-price target, on the view that the downgrade to long-term guidance could be worse than expected. In a note to investors, he said the organic-growth cut was worse than what he was expecting.
"We were also worried about rising input costs and valuation. On input costs we feel more comfortable that Danone have weapons to offset higher commodities," he said.
Both Ackerman and Wood noted comments from management that there's no reason that they couldn't return to 8% to 10% growth beyond 2012.
"On a rating of 16.5 times 2010 price/earnings, Danone needs upgrades to kick on. One would need to believe that Danone could materially beat 5% organic growth to drive upgrades. While difficult, this is not infeasible," said Ackerman.
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