Danone's Food May Be Healthy but Its Stock Is Not

NEW YORK (TheStreet) -- The French food company Danone SA (OTC: DANOY) has long been known as the maker of yogurt, including the Activia, Oikos and Ser brands.

But this company also has a healthy business in flavored and vitamin-enriched water under its Evian and Aqua brands, among many others, and a medical nutrition division. It is in this area where several competitors, including Nestle (OTC: NSRGY) and the American Mead Johnson Nutrition (MJN) are trying to eat Danone's lunch.

Danone's American depositary receipts are not so healthy. They have an average three-month daily volume of over 1,042,000, although on Tuesday volume was less than 136,000 shares. They closed down 1.2% to $13.77 Tuesday and are down 5.2% for the year to date.

Shares of Danone have corrected almost 15% from its 52-week high of $16.12 to Tuesday's closing price, and are selling at less than 17 times forward (1year) earnings. This is a big company with a market cap of over $40 billion, but if its shares keep tumbling it will soon challenge the 52-week low of $13.29.

What's the problem with this company's stock? After all, it is one of the first food companies to manufacture and market a yogurt with pro-biotic bacteria that could be categorized as a "medical food."

And its Medical Nutrition division, which markets primarily under the Nutricia brand, provides specialized food for people receiving medical treatment, babies afflicted with certain illnesses and the frail elderly. Its products include liquid oral nutritional supplements, hypoallergenic products and oral and feeding tube food products for the dietary treatment of infants and children, among many others.

However, the U.S. Food and Drug Administration, on its Web site, classifies medical food in quite a different way.

As the FDA defines it, "Medical foods are distinguished from the broader category of foods for special dietary use and from foods that make health claims by the requirement that medical foods be intended to meet distinctive nutritional requirements of a disease or condition, used under medical supervision, and intended for the specific dietary management of a disease or condition."

So the difference between "medical foods" and "medical nutrition" is quite subtle.

Whether or not the FDA considers yogurt a "medical food," Danone faces competitors in that area.

First and foremost is the giant Swiss conglomerate Nestle. Americans know Nestle as the purveyor of chocolate bars and Gerber baby food. With a market cap of over $237 billion, Nestle has a powerful lineup of internationally famous food products.

Now Nestle is aiming to create foods that offer medical benefits such as nutritionally injected power-drinks and liquid smoothies. By enhancing these products with stem-cell-like cells that come from mature human cells, the company plans, as it has expressed on its Web site to "...take advantage of the space between food and pharmaceuticals."

This version of "medical food" could be the next blockbuster profit center for food companies like Nestle and Danone.

Danone also has to contend with the growing international dominance of U.S.-based Mead Johnson Nutrition. It's a company worth knowing because even though it has a market cap of around $16 billion, it is beginning to take market share away from the French company by creating a bigger footprint in regions like Asia.

In a recent article by Jamie Hodge, a number of analysts said they like MJN partly because Mead Johnson "manufactures, distributes, and sells infant formulas, children's nutrition and other nutritional products. The stock currently has a dividend yield of 1.7%. MJN has a PE ratio of 25.2. Currently there are five analysts that rate [MJN] a buy, no analysts rate it a sell, and seven rate it a hold."

The competition is gaining traction in the infant formulas, children's nutrition, and nutritional products and medical foods space and MJN seems to be benefiting in a big way.

I'll close by showing you a one-year price chart of this remarkable company, which happens to report earnings Friday.

MJN Chart
data by YCharts

Investors may prefer Danone's yogurt, but MJN could be healthier in your portfolio.

At the time of publication the author had no positions in the companies mentioned in this article.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial writer and editor, he specializes in unique investment strategies, growth with income stocks, overlooked investment themes, tax-advantaged themes, risk management, technologies to capture gains and reduce losses, real estate related opportunities,effective wealth preservation techniques, and the use of ETFs for diversification and asset allocation. He also follows and frequently writes about technology, health sciences, energy and resource companies. Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.

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