When Others Are Fearful: Danone and Europe

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Berkshire Hathaway’s annual shareholder meeting is quickly approaching and I am reminded of Warren Buffett’s famous quote from 8 years ago: “Be fearful when others are greedy and greedy when others are fearful.” That second part is easier said than done, as it is extremely difficult to have the financial courage to run towards danger when everybody else is fleeing from it at full speed. But that kind of financial courage often presents the best opportunities to make the most money.

With the S&P 500 making new all-time highs and up over 130% from its 2009 low, if you were fearless enough to buy any number of great American companies when fear permeated the markets, you made out like a bandit. Europe could be a second chance to put the Oracle of Omaha’s words into practice, with European indices like the French CAC 40 needing to rise about 70% just to return to its June 2007 generational high. For investors fearless enough to buy any number of great European companies in these times of fear, Groupe Danone (NASDAQOTH: DANOY.PK) could be just such an opportunity.

One of the men behind the Heinz turnaround, and eventual buyout by the previously mentioned Berkshire Hathaway, was activist investor Nelson Peltz. Last year Peltz decided to try his hand at another food giant, purchasing a one percent stake in the $45 billion dollar yogurt, baby food, bottled water and medical nutrition company, Danone. Soon after acquiring his stake, Peltz laid out his investing thesis to the public. He saw Danone as “one of the best positioned food companies for increasingly health-conscious consumers,” involved in many high-growth categories and having one of the consumer staples industry’s highest exposure to the fast-growing emerging markets.

Despite all of this, Danone is trading at valuation multiples well below its historic averages and trading together with similar-sized, but slower growing and structurally challenged, US food companies. All being overlooked due possibly to the fear of the region this Paris-based company happens to be headquartered within.

There is no doubt, though, that Europe has been a challenge for Danone -- the region makes up more than 38% of the company’s sales. In the first quarter of this year, Danone’s European sales declined by 5.1%, a continuation of previous quarterly declines. Contributing to the sales decline were the unusually high unemployment in Southern Europe (Greece and the like) and overall weak European consumer spending.

That is definitely not good, but the company does not live or die based on its European operations. If investors were to only focus on that European negativity, they would be doing themselves a disservice. While Europe helped to drag down Danone’s first quarter results, the remaining 62% of sales helped pick the company back up. With its high exposure to the emerging markets, increasingly strong business operations in North America and continued investments in Japan, the rest of the company was able to contribute over 10% sales growth this quarter, giving Danone an overall worldwide sales growth of 5.6%.

Not only has this European company been growing away from Europe, but it has done so at the expense of a major US rival, the American food giant General Mills (NYSE: GIS). This year, Danone finally surpassed General Mills’ Yoplait brand to become the No. 1 yogurt company in the United States (one of the few countries where Danone was not No. 1). It was just two years ago that had General Mills with a commanding 31.6% US market share lead over Danone’s 26.7% market share. Today Danone occupies 27.8% of the US yogurt market, with General Mills and Yoplait falling to 25.8%. Quite a major American coup for this French company.

Over in the emerging markets, there has been a growing demand for baby formula, where Danone competes with the US-based Mead Johnson Nutrition (NYSE: MJN) and the recently demerged Abbott Laboratories (NYSE: ABT). A good example of this growing baby formula demand can be seen in a curious bit of news out of the United Kingdom a few weeks ago, where Chinese demand had led to ‘rationing’ half a world away. The Chinese public has been increasingly skeptical about Chinese baby formula companies after a series of contamination scares and scandals. One such in 2008 resulted in the deaths of six babies and at least 50,000 hospitalized (though official Chinese government estimates are likely understated).

This has caused Chinese parents to demand safe and trustworthy foreign brands of powdered baby milk. This, in turn, led some UK residents to head to their local stores; emptying store shelves as they bought Danone, Mead Johnson and Abbott Lab’s various UK brands in bulk for the purpose of exporting them to China for a profit. This exporting scheme became so prevalent that many UK stores had to impose a two tin-only policy to ensure that UK parents could find formula for their own children. Since then, Danone has announced that it will increase supplies even further to China to meet the recent surge in demand. Currently Mead Johnson is the leader of this group in China baby formula sales (about $1.2 billion annually). But much like with yogurt and General Mills, Danone (and Abbott Labs) has been gradually eating away at Mead Johnson’s China lead.

(Danone, Mead Johnson and Abbott Labs also compete in another product category, medical nutrition, discussed in detail in my previous article.)

There are plenty of reasons to be fearful of Europe -- the PIIGS (Portugal, Italy, Ireland, Greece, Spain), debt, austerity, defaults, bailouts, politicians and unemployment are just a few. It would be insane to pretend that Europe is not a mess. But lost within that constant negativity and fear are great European companies making the best out of a bad situation, and succeeding in spite of Europe. Great European companies that could be even better in the future, but are up for grabs today for investors prepared to be greedy when others are fearful.

Matthew Luke owns shares of Groupe Danone. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus