The verdict on Danones 2014 outlook

The verdict on Danone's 2014 outlook

Danone booked a drop in 2013 earnings today (20 February) as margins were dented by higher input costs in fresh dairy. However, the group that it is taking action to stabilise margins - prompting analysts to largely conclude that the worst could be over for the French dairy giant.

Alain Oberhuber, MainFirst

"Danone's FY 2013 result showed stronger organic growth with 4.8% versus market of 4.7% but margins slightly lower at 13.2% versus 13.4%. There was stronger growth in fresh dairy and baby nutrition and slower growth in waters. The outlook [was] positive on organic growth and margins. After the weaker trend, we expect the market could like the result and outlook. Danone had stronger organic growth in dairy with FY 2013 of 3.2% versus consensus of 3.1% and baby nutrition with 3.6% versus consensus of 3.2%. 

Danone confirmed its guidance [for] FY 2014 organic [sales] growth of 4.5% to 5.5% in comparison to our and market estimates of 5.1% and EBIT-
margin development of flat to +/- 20 basis points in comparison to our 13.4% (improvement of +20 bps) and market consensus of 13.3% (+10 basis points). Organic growth in fresh dairy in Asia/Africa, Russia and North America will continue at a high level.

The negatives: one, lower operating margins of around -20 bps, guidance for FY 2014 with a wide range bears low visibility due to the investment in Chinese baby nutrition; two, as expected lower organic growth and operating margins significantly down in H1 2014 with a strong rebound in H2, reduce visibility for FY 2014.

Jon Cox, Kepler Cheuvreux

"Danone's 2013 results came in line a shade light of expected. The company said it expected sluggish trends in Europe to continue, ongoing significant milk price inflation and also exchange rate volatility. It expected like-for-like sales growth of 4.5-5.5% (market circa 5%) with a stable trading operating margin in a -20bp to +20bp range, with improvement weighted toward the second half of the year. It said the improvement trend was only gradual in key China market in terms of its infant nutrition business. We believe the worst is probably over in terms of negative newsflow after the company's problems of the last 24 months (Europe dairy, China infant nutrition) but wouldn't be surprised to see some further trimming of estimates post the results."

Andrew Wood, Sanford Bernstein

"Danone's reporting/guidance was slightly disappointing but it was not a disaster...which, after a couple of years of more significant disappointments, is probably good news for Danone. FY 2014 guidance for like-for-like growth of 4.5-5.5% was exactly in line with our expectations of "about +5%".

However, there was a reduction in 2014 margin guidance from management's previous promise of "growth" to now "stable" (in the range of -20bps to +20bps)...although consensus was already quite sceptical and was assuming flat margins. We would expect a 2-3% cut to 2014 consensus and our EPS expectations for the company but, given how negative sentiment has been on the stock lately, the reaction might be a sign of relief that things are not worse."