Danone (BN) and Nestlé (NESN) are food concerns based in France and Switzerland, where they are also listed. Companies in this sector may enjoy popularity in times of recession, thanks to stable demand for their products and the high levels of cash flow (cash).
Danone's main sources of revenue come from dairy and vegetable products (54%), special nutrition products (30%) and the sale of bottled water (over 16%). The company is relatively geographically diversified, with the United States being its largest market (20%).
Nestlé has a more varied and diversified offering. 28% of revenue comes from beverage sales, 18% from pet food sales, 15% from dietary supplements, 14% from condiments and ready meals, and 12% from dairy products. As with its competitor, the largest market is the United States (more than 30%).
Companies in the food products sector can be a good way to secure capital in times of recession. Due to the sale of the products necessary for life, these companies generally seem not to experience a significant drop in revenue and generate a lot of cash, which could provide them with a margin of safety, especially in such a volatile macroeconomic environment.
However, recent quarterly financial results have shown that Danone and Nestlé are facing rising costs despite revenue growth of 12.6 and 9.1 %, respectively. Because of this, their net profit margins and thus profits have declined significantly. They recorded net profit declines of 31.0 and 11.7 %, respectively. Danone appears to be losing more through its large share of production in Europe, which is falling victim to sharply rising energy and raw material prices.
Over the course of 2022, BN and NESN shares lost 7.9 and 12.7%, respectively. However, it could be assumed that the performance and behavior of these companies' shares against the market may improve if there is a global recession that halts rampant commodity prices, and the aforementioned companies manage to adjust to the new inflationary environment. In this case, margins could expand again.
JPMorgan's new recommendation for food conglomerates upholds the previous "buy" signal, which seems to be justified by similar analysts' assumptions. According to the MarketScreener portal, Danone and Nestlé have 25 and 27 recommendations, respectively. Sentiment towards the former is rather worse, with 8 "strong buy" recommendations, 2 "buy" and 11 "hold" recommendations. While the latter enjoys 11 "strong buy", 6 "buy" and 7 "hold" recommendations.
The average target price for BN is 58.58 euros, which could indicate a possible 12.3% increase from the last closing price of 52.26 euros. NESN has an average target price of 124.96 francs, which could indicate a 10.2% increase from the last closing price of CHF 113.42.
It's worth mentioning that the failure to exit the Russian market, which accounts for several percent of their sales, could pose an image threat to Danone and Nestlé. The companies have made only token concessions to their operations in the Russian Federation. Nestlé, for example, has stopped local production and sales of only selected goods (KitKat and Nesquik), while the rest have been designated as "essential goods" and continue to be a source of revenue for the company. This, however, does not seem to pose a significant risk, as these companies have already been implicated in numerous scandals that have not had a long-term impact on their share price.
Rafał Tworkowski, Junior Market Analyst, Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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