Groupe Danone SA (BN) Has a 46% Upside Potential: Mondelez International Inc. (MDLZ)

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Recently, famous activist investor Nelson Peltz turned bullish on one of the largest French food companies, Groupe Danone SA (EPA:BN). After Nelson Peltz’s presentation at the beginning of November 2012, Groupe Danone SA (EPA:BN)’s share price has risen from €49.80 ($64.91) to €53.46 ($69.68). The company’s American Depository Receipt (ADR) has risen from $12.50 to $14.50 in the same period. Nelson Peltz thought that the company must be worth €78 ($101.67) per share by the end of 2014, a 46% premium on its current share price.

Let’s find out whether or not investors should follow Nelson Peltz into Groupe Danone SA (EPA:BN) at its current share price.

Danone SA (ADR) (OTCMKTS:DANOY)Yogurt is the biggest business

Groupe Danone SA (EPA:BN) is considered to be one of the largest French producers of fresh milk products, baby foods, biscuits, cereal products, and bottled water, operating in four main business segments: Fresh Dairy Products (Yogurt), Waters, Baby Nutrition, and Medical Nutrition.

The majority of its revenue, €11.67 ($15.21) billion, or nearly 56% of total revenue, was generated from the Fresh Dairy Products segment. The second biggest revenue contributor was the Baby Nutrition segment, with nearly €4.26 ($5.55) billion in 2012 revenue, while the revenue of the Waters segment and the Medical Nutrition segment were €3.65 ($4.75) billion and €1.29 ($1.68) billion, respectively.

Groupe Danone SA (EPA:BN) seems to have a quite reasonable capital structure. As of December 2012, it had €12.25 ($15.97) billion in total shareholders’ equity, €6.29 ($8.2) billion in net debt, and nearly €5.38 ($7) billion in working capital. However, it had a huge intangible asset of more than €16.26 ($21.19) billion at the end of 2012. The huge intangible assets have made Groupe Danone SA (EPA:BN)’s tangible book value negative.

Three reasons to invest in Danone

In November 2012, Nelson Peltz’s Trian Fund Management reported that it had around 1% economic interest in the company.  He believed that the company was trading at a huge discount to its intrinsic value, and he “targeted strategies to improve performance, such as a leaner cost structure and refraining from dilutive mergers, could generate significant shareholder value.”

There are three main reasons to get excited about Groupe Danone SA (EPA:BN). First, Danone possesses a great “21stcentury” portfolio. The majority of its earnings before interest and taxes (EBIT) are derived from the Yogurt segment. Bottled Water represented 17% of the total EBIT, and Baby/Medical Nutrition accounted for 37% of the total EBIT. Its biggest segment, Yogurt, is the leader with 23% of the global market share.

Second, Danone has the highest exposure to the emerging markets among consumer staples companies. The majority of the company’s sales, 52%, come from the emerging markets, while Nestle generated 40% of its sales from the emerging markets. Mondelez International Inc. (NASDAQ:MDLZ), another giant food corporation, has 45.4% of its sales in the developing markets.

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