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Stock Strategist

Market Overlooks Danone's Prospects for Margin Expansion

Growth is slowing, but we see profits improving.

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 Danone (DANOY)/(BN) is at a crossroads. The packaged food firm that was once the darling of growth investors, with a presence in categories with strong consumption growth drivers, has become a victim of its own success as management has struggled to control growth amid a series of external and internal shocks. It has been a painful ride for investors, with the stock at similar levels today as it was in 2007. After a change of management, however, Danone appears to be moving toward a more centralized structure that we think should make it a competitive force greater than the sum of its parts and build internal defenses against such shocks.

Danone possesses a narrow economic moat derived from strong competitive positions in its dairy and infant formula businesses. These competitive advantages should preserve Danone’s market shares as strong economic, demographic, and consumer trends drive volume growth. On top of population growth in Danone’s geographic footprint, per capita consumption growth is likely to occur in almost all segments, thanks to urbanization, economic development, and an increasing consumer preference for healthier food and beverages.

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Philip Gorham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.