Barron’s Plug For Broyhill and Stamos

After reading a few bullish pieces on Greek equities in Barron’s late last year, we sent a few things their way supporting the case for European stock markets more broadly, and specifically illustrating our work on a Greek favorite, Coca Cola Hellenic, which we published here.  Since then, we’ve had several conversations with the European team discussing some of our interests abroad.  This weekend, Barron’s highlighted one of our morning favorites – Greek Yogurt!  The article, Fermenting Change at Danone, highlights Trian Fund Management’s position in the stock.  Our thesis, as discussed with Barron’s, is quite simple:

  • Trian’s assumptions are not unreasonable.  We tend to look at investments on a three to five year horizon.  On this basis, total annual return potential is greater than 20% annually over the next three years assuming sales growth of 7% annually, 50 bps to 100 bps of margin expansion, and share repurchases with excess cash flow (which they have done regularly).
  • Management appears to be taking the right steps given recent announcement of €200mm in annualized savings.  On our estimates, this should add about 80bps to margins in 2015 which would put them in line with Trian’s 15.1% target.   In other words, we think these hurdles are set pretty low so it’s hard to say they won’t hit them.
  • Danone has favorable geographic exposure (52% EM), favorable product lines (growth forecast in the high single digits), and is cheap (trading in line with slower growing peers and slightly below its own historical levels.

Danone

 The stock is currently trading at the low end of its trading range over the past decade.  We think there is a lot of room for the stock to rerate higher.  As “the street” begins to see evidence of margin improvement, the valuation should move back towards its historic average or higher, given the amount of skepticism surrounding the company today – there are currently more “holds” on the stock than “buys” on Wall Street.  Danone is an exceptionally high quality business with significant exposure to the emerging market consumer and strong growth trends in healthy foods, trading at a discount.  We don’t think that will last for long if Stamos has anything to say about it.  Right Uncle Jesse?