KEVIN DREYER
RESEARCH ANALYST,
GAMCO GLOBAL OPPORTUNITY
GABELLI & COMPANY, INC.

COMPANY: Groupe Danone
TICKER: DA (NYSE)
PRICE: $ 26.50
52-WEEK RANGE: $27.50–$18.78
MARKET CAPITALIZATION: $32.4 billion

Kevin Dreyer is a food and beverage research analyst and an associate portfolio manager of the GAMCO Global Opportunity Fund at Gabelli & Company, Inc. Groupe Danone is based in Paris, France, and employs 89,449 people. At the recommendation of GAMCO CEO Mario Gabelli, who called the stock “good for health-conscious New Yorkers,” Mr. Dreyer spoke to Elisa Mala about the health (and financial) benefits of bacteria.

What does the company do?

It has essentially three segments. The first is fresh dairy, which is primarily yogurt and similar products. That’s roughly 55% of sales. The remaining is broken down half and half between beverages (primarily water) and biscuit and cereal products, which is primarily in France.

Why do you recommend this stock?

The global yogurt market has been growing by about 7% the last five years and is probably going to grow something similar to that over the next five, so this should be a pretty fast growth category for the food sector, which typically grows more in the 3–4% range.

The whole food industry is trying to get into health and wellness in various ways. It’s a big trend, and everyone in the U.S. is thinking about eating healthier. Their core product, which is yogurt, fits well with the health and wellness trend.

Their beverage business, which is primarily bottled water, has a brand called Wahaha in China. It’s nearly 10 times larger than its nearest competitor. We see the growth prospects for that group to be excellent as well.

What’s driving growth forward?

In Western Europe and especially in France, there is pretty high consumption per capita. In France, for instance, the typical person consumes over 30 kilograms (66 pounds) of yogurt a year. In continental Europe, it’s about 22 kilograms. In the U.S., it’s about five.

Also, Danone is at the forefront of probiotics. Yogurt is basically milk plus bacteria, but probiotics have additional strains of bacteria that have specific health benefits. The most recent one that has been launched in the U.S. is Activia, which is for aiding digestion. This is the first probiotic product that has been launched in the U.S. That’s a pretty big market that is untapped right now.

In the U.S., there are two companies that have over 70% of the market share. One is Danone, with Dannon, and the other is General Mills, with Yoplait.The rest are small local farms or other national companies that have 1% or 2% share.

When is it a good time to buy?

Right now is a great time to buy. The stock has moved up pretty considerably this year, but looking at the value of both multiples right now — 9.6 times my ’07 EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) estimate and about 18.5 times my ’07 PE (price-earnings ratio) — the price is still reasonable, especially for a company with these growth prospects. In the meantime, the fundamentals for the business are terrific. Barring any significant differences in the way the business is run, which I don’t really foresee, valuation would be the only thing to make me move it to a hold.

What are the risks associated with this stock?

Currency is always a factor in buying a foreign stock. Danone is traded in Euros, but they have a good chunk of sales in the U.S. in dollars. To the extent that the dollar is weak, that will hurt their sales growth numbers as that is translated back into Euros.

If there was a stark reversal in the trends we’ve been seeing in both yogurt and bottled water, that might be a risk, though I certainly don’t anticipate that happening.

In terms of competitive risk, General Mills hasn’t come out with their own probiotic product from Yoplait. In theory, if there were a lot of competition in the probiotic segment, that could hurt their margins a little bit.