Nestle Growth May Trail Danone as Rival’s Health Focus Pays Off

Nestle SA’s sales growth may trail that of Danone for a second year in 2011 as its smaller French rival benefits from a greater concentration on healthy food and emerging markets such as Russia and China, analysts said.

Nestle’s revenue, excluding acquisitions, divestments and currency shifts, will probably rise 5.6 percent in 2011 after 5.4 percent growth last year, according to the average of analysts’ estimates compiled by Bloomberg. Paris-based Danone yesterday said it expects sales at that level to climb 6 percent to 8 percent in 2011 after gaining 6.9 percent last year.

Danone, which sold its cookie unit in 2007, now gets all its sales from healthy food such as of Activia yogurt, according to Warren Ackerman, an analyst at Evolution Securities. He estimates that the market for healthy food is expanding about 5 percent to 6 percent a year, three times faster than the food industry overall. Nestle has committed to becoming the world’s leading nutrition company, though still got more than a tenth of 2009 food and beverage sales from chocolate and confectionary.

“Danone will deliver the best organic growth” among European food companies in 2011, Ackerman said. “It is virtually impossible to get this exposure to genuine growth segments from any other quoted food stock.”

About 50 percent of Danone’s 17 billion euros ($23 billion) of sales last year came from emerging markets, where food spending is rising faster than in developed countries. Nestle Chief Executive Officer Paul Bulcke has given the Vevey, Switzerland-based KitKat maker a decade to raise the proportion of emerging-market sales to 45 percent from about a third.

‘Right Geographies’

“In Danone, you’ve got a portfolio that’s geared into the right geographies and the right categories,” Ackerman said.

Danone also can boost sales faster than Nestle because it’s not exposed to “sluggish” food segments like confectionary, said Chris Wickham, an analyst at Matrix in London.

Still, more analysts prefer Nestle shares to those of its smaller rival. Only two of 45 analysts monitored by Bloomberg advise investors to trim their Nestle holdings, while 26 have the stock at “buy” and 17 at “hold.” Six out of 43 analysts have Danone as a “sell,” 20 say “buy” and 17 “hold.”

Danone trades at a multiple of 15.2 times estimated 2011 earnings, making the stock cheaper than Nestle at 15.8 times.

“Danone are very geared into some very important markets,” Ackerman said. “If any of those go wrong for whatever reason -- currency, a downturn in consumption -- you’ve got bigger risk on the downside in Danone than Nestle.”

Earnings Estimates

Nestle reports full-year earnings tomorrow. Profit probably more than tripled to 35.1 billion francs ($36.3 billion) in 2010 because of a capital gain from the $28.3 billion sale of a majority stake in eyecare company Alcon Inc., according to the average estimate. Excluding the gain, profit probably rose 5 percent to 10.9 billion francs from 10.4 billion francs.

Nestle’s operating margin will probably widen to 13.67 percent this year, from an estimated 13.36 percent in 2010, based on the average estimate.

Danone’s 2011 sales forecast “stands out markedly from those of peers,” Pierre Tegner, an analyst at Oddo Securities in Paris, wrote of Danone in a note to clients.

Unilever last week said underlying 2010 revenue rose 1.4 percent in its savoury, dressings and spreads unit and 6.1 percent in its ice cream and beverages division.

Danone, which has about a fifth of the sales of Nestle, has been more aggressive than competitors in focusing its business on faster-growing areas, analysts said. The sale of the cookie unit helped pay for the acquisition of Dutch baby-food maker Royal Numico NV. Last year, Danone acquired a majority stake in OAO Unimilk to become Russia’s biggest dairy company.

Nestle Acquisitions

Nestle’s three largest acquisitions in the past four years have been in developed markets, including Kraft Food Inc.’s frozen pizza business, Novartis AG’s medical nutrition unit and the Gerber baby food brand.

Nestle hasn’t fulfilled some analysts’ speculation that the company may use the cash from Alcon to make a major purchase. The Purina pet-food maker may announce plans to buy back 10 billion francs to 20 billion francs worth of stock once its existing repurchase program ends, according to Jean-Philippe Bertschy at Bank Vontobel, who rates the stock “buy.”

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