Healthy Value Opportunity: Groupe Danone SA (ADR) (DANOY), H.J. Heinz Company (HNZ), Kraft Foods Group Inc (KRFT)

Just four months ago activist investor Nelson Peltz took a 1% stake in and laid out his investment thesis for the Paris-based food giant Groupe Danone SA (PINK:DANOY). Peltz most recently made headlines when Warren Buffett’s Berkshire Hathaway announced the $23 billion dollar acquisition for H.J. Heinz Company (NYSE:HNZ). This is a deal that was made possible due in part to Peltz’s advocating for change at Heinz going back in 2006. Shares of Heinz are up about 125% (including dividends) since that time. Peltz’s track record is not limited to Heinz; playing a role in the turnaround of many other large-cap food companies. This is a man who knows his food. With the H.J. Heinz Company (NYSE:HNZ) acquisition now behind the M&A world, it might be prudent to take a look at Peltz’s latest food project.

High-growth health food

Some large-cap companies appear to be doubling-down on unhealthy food products. The recent Kraft Foods Group Inc (NASDAQ:KRFT) spin-off is a good example, with the rebranded Mondelez International Inc (NASDAQ:MDLZ) becoming almost a pure-play on sugary-salty junk food. Danone however is a large-cap company uniquely equipped with the worldwide reach and market position to capitalize on the growing worldwide trends of healthier eating and living.

Danone’s product types include the high-growth categories of baby formula, yogurt, bottled water and baby food, with an estimated annualized growth rate of 12.1%, 8.5%, 6.7% and 5.8%, respectively. Yogurt in particular is a category to focus on; which make up more than half of the company’s revenue. Yogurt is also a category in which Danone is No. 1 in the world, and easily No. 1 at that. Danone worldwide yogurt sales are nearly quadruple its closest competitors, No. 2 General Mills, Inc. (NYSE:GIS) and their recently acquired Yoplait brand.

High-growth emerging markets
With products available in over 40 countries. Danone emerging market exposure is one of the highest among the consumer staples companies. Emerging market sales account for 52% of worldwide sales. Even more impressive, the margins in their emerging market countries are actually higher than the margins in Danone’s developed market countries. Part of this is due to the sorry state of consumer spending and confidence in Europe, but a larger part is due to Danone’s exceptional execution in China, Latin America and elsewhere.

Slow-growth valuation
Despite Danone’s strong emphasis on high-growth health food categories and the company’s extraordinary efforts in the high-growth emerging markets, investors are not giving Danone the credit or premium that it deserves. While consumer staples companies in the United States have justifiably received premium valuations for their emerging market exposure, Danone is instead below its historical valuation average. Over the past 10-years, Danone has traded at about 18.7 times next year’s earnings (as high as 25 times its forward P/E in 2007). Today Mr. Market has given Danone a forward price to earnings multiple of 17.6, despite arguable being a better run and more emerging market-focused company today than in 2007 before the stock market crash.