Analysts develop taste for number one yogurt firm

Today 43.5 million people will eat a Danone yogurt, according to the Paris-based multinational which is flavour of the month with analysts.

The world's number one producer of yogurt has been issued with a "strong buy" recommendation by Morgan Stanley Dean Witter, compared to a not-so-enthusiastic "outperform" for its major competitor, Nestle, meaning it will outperform in its sector but share-price targets have been reduced "to take on board the limited short-term visibility".

In common with Danone, and the other leading food stocks such as Unilever and Cadbury Schweppes, Nestle - the Swiss corporation and the world's largest food company - has sought to expand in growing economies while reducing its dependence on the price of raw materials. It has a diverse range of interests, spanning beverages, dairy products, prepared foods, chocolate and confectionary, and pharmaceuticals.

But it cites high value-added products such as ice-cream, mineral water and pet food as areas on which it will increasingly focus. Nestle expanded its mineral water volume sales by 8.4 per cent last year.

In general, much of new product development is aimed at so-called nutritional foods, such as Danone's live-culture yogurt, Actimel, which are aimed at linking food with healthier living.

But in the developing economies of South America, south-east Asia and Russia, the marketing strategies of most food companies is in disarray.

Nestle's real internal growth was 3.3 per cent last year, short of its 4 per cent target, despite a 4.6 per cent growth in the first 10 months of the year. The slump in sales was "aggravated. . . by extraordinary events outside the company's control", the firm noted.

Nestle took an estimated 60 per cent hit in Russia on its volume shortfall compared to management expectations.

It also fell victim to a 20 per cent volume contraction from Asian woes, with blackmailing attempts in Germany and Italy, accounting for the final 20 per cent.

The extortion efforts from an animal rights group revolve around contamination of food products with pesticide to stop what the group claimed was Nestle's "mass poisoning with its products which are the result of genetic manipulation". A reward of up to one million deutschmarks (€511,292) has been offered for information leading to the arrest of the blackmailer.

Notwithstanding these factors, Nestle's margin development has been weak and the company has suffered from a lack of restructuring. In contrast, Danone "is a strong buy", according to Morgan Stanley, due to its volume and margin improvements. Its operating margin rose to 10 per cent from 9.1 per cent in 1997.

JP Morgan also issued a "buy" recommendation for Danone, citing the relative narrowness of its product spread - yogurt, biscuits and water, "a healthy diet in difficult times".

Danone avoided the worst of the impact of economic crises worldwide through "a favourable geographical mix, heavily weighted towards western Europe where private consumption is expected to remain healthy in 1999".

"Second, in Latin America, Asia and eastern Europe, which contributed 15 per cent of 1997 sales, Danone should still enjoy positive if slower internal growth owing to a favourable country mix and a continued marketing push," JP Morgan states.

Analysts say the "big four" are under pressure to be more shareholder friendly, to divest themselves of non-core activities and to focus on their strong franchises.

Danone is divesting itself of its grocery division while Cadbury Schweppes, the Britain-based confectionary and drinks group, recently agreed to sell its non-US, French and South African drinks brands, including Schweppes, Dr Pepper, and Canada Dry, to Coca Cola for £900 million sterling (€1.3 billion).

It will also sell its non-US bottling assets over the course of 1999 for an expected £450 million. Cadbury Schweppes did not have the international muscle to distribute "a limited portfolio of brands", according to one analyst.

As a market performer, it has suffered from exposure to volatile currencies and warned its fourth-quarter earnings would fall below estimates. But Merrill Lynch recently gave the stock a long-term "buy" recommendation, based on its new flexibility from achieving eventual net cash of almost £1 billion.

"Cadbury can comfortably afford a 10 per cent equity buy-back. This option is under serious consideration while we also expect the group to pursue tactical acquisition opportunities in confectionary markets," Merrill Lynch states.

As a FTSE-quoted blue-chip stock, it is looking to the establishment of a euro stock exchange to get over the problem of trading in sterling while institutional investors favour similar stocks for their euro-trading advantage.

Unilever, the British-Dutch multinational, gains 50 per cent of its turnover from food sales, 25 per cent from personal products and 20 per cent from detergents. Although citing long experience in emerging markets, it has suffered from Brazil's new currency weakness.

It is harvesting - reducing advertising and getting returns from declining volumes - in categories where it lacks critical mass and in preference to selling off such brands, according to the Morgan Stanley analyst.

Goldman Sachs put the stock on its recommended list. "We continue to think that the management actions taking place in Latin America, in terms of both portfolio focus and cost reductions, apply equally to other regions of the world.

"Through greater financial focus, Unilever should be able to continue to deliver significant margin improvements over at least the next several years leading to underlying double-digit earnings growth," it says. See Director's Chair, back page

Kerry and Avonmore Waterford - as, in common with many other Irish stocks, as undervalued., partly for not making it to the top of euro zone stocks but also through keeping their main focus on developed economies. "In terms of share price Irish companies have done quite poorly last year," he says.