(News Bulletin 247) – The bank has raised its advice to “overweight” on the agri-food group whose recovery is sending encouraging signals. She also considers that the company faces much less pressure than its competitors linked to the rise of anti-obesity drugs.

For several years, Danone suffered from comparison with its gigantic Swiss rival Nestlé, posting much lower margins and growth than the Swiss group.

To give a boost to the group’s dynamics, the general director, Antoine de Saint-Affrique, who arrived in 2021 at the helm of the company, launched a strategic plan in March 2022 called “Renew Danone”. This plan aims to restore the competitiveness of the company and return to growth. Antoine de Saint-Affrique then noted that a quarter of the group’s product portfolio was showing unsatisfactory performance (decline in growth, destruction of value), and that part of these declining activities (10% of the portfolio) could be transferred.

Although this strategic reorientation necessarily takes time, it is clear that Danone’s latest publications show that the group is on the right track.

The company’s third quarter illustrated this well. Published last week, the group’s activity was a positive surprise, with like-for-like growth of 6.2% over one year, while the consensus was only 4%. Danone has also raised its growth objective, now counting on a like-for-like increase of between 6% and 7%, compared to a range of 4% to 6% previously. The market, the action having progressed by 2.4%.

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Volumes ready to take off

Enough to encourage Morgan Stanley to be optimistic. This Wednesday the American bank raised its recommendation on the stock, going from “underweight” to “overweight”, the equivalent of buying. In response, Danone shares rose 1.6% on the Paris Stock Exchange around 12:30 p.m.

For the bank, Danone’s restructuring plan is “starting to bear fruit”. According to her, Danone is the only group in its sector (consumer goods) in Europe to have exceeded expectations in terms of organic growth in the third quarter, and one of only two to have raised its objectives. This despite the deterioration in consumer confidence. This performance reflects the progress linked to the strategic plan, “but also the fact that the group is less vulnerable to price cuts and competition from private labels than is generally thought”, argues Morgan Stanley.

“We believe that Danone is emerging from (its) restructuring period and that volume growth should become positive from the fourth quarter and until 2024,” adds the bank.

The increase in volumes coupled with an improvement in Danone’s gross margin will allow the company to improve its profits, with Morgan Stanley anticipating average annual growth of nearly 9% in earnings per share between 2023 and 2026.

Well positioned against anti-obesity drugs

Beyond the outlook for results, the bank also believes that Danone faces much less pressure than its competitors compared to the recent boom in anti-obesity drugs observed in the United States.

This enthusiasm for these treatments has led investors and analysts to anticipate significant changes in consumer behavior, particularly in food, with potentially fewer purchases of fatty, salty products or alcohol but more purchases of foods linked to well-being or health.

Morgan Stanley judges that Danone could in fact benefit from these trends, the bank estimating that the equivalent of 71% of its revenues (such as its yogurts, waters or plant-based products) are favorably exposed to these potential changes in consumption.

Barclays had also made a similar observation a few weeks ago, the British bank also judging that Danone could emerge a winner from the rise of anti-obesity drugs. This is because consumers are turning more towards healthy and protein products such as yogurts or plant-based foods. However, the French group has “the healthiest portfolio of products among the food groups in our coverage”, argued the British bank.

Exaggerated concerns about Chinese infant formula

Finally, Morgan Stanley considers market concerns about the company’s prospects in infant milk in China to be “overblown.” These concerns are linked to a profit warning from a Chinese company in this sector, China Feihe, to the announcement of the American group Abbott to leave this infant milk market in China or to the decision of Nestlé to close a production site. production in Ireland for export to China.

But Morgan Stanley emphasizes that Danone has been able to continue to gain market share thanks to its capacity for innovation and that consolidation in the sector should support the competitive environment (and therefore prices). The bank therefore considers that the company will still be able to generate growth in this infant milk segment in China while defending its margins.

All these elements lead Morgan Stanley to consider that the discount between Danone and Nestlé is too significant, the bank noting that the French group’s action trades around 15 times the expected profits for next year compared to around 18 times for Nestlé .