Trends can be dangerous things. What's hot one moment can be ice-cold the next, and you're left hanging on to leg warmers or Members Only jackets that you really don't want to wear. It can be even more complicated for companies because even if a trend proves durable, competition can whittle away the profitability.
Such has been the case for French food and beverage company GroupeDanone
With speculation over the fate of the water business dogging this company for some time, it now looks as though management is prepared to deal with the issue and move on. As a first step, the company recently announced a write-off of 600 million euro (more than $770 million) for some of its U.S. and European water businesses. Although the company hasn't yet announced further plans, management indicated that it will have more decisive plans by the end of the first half of 2005.
At present, Danone is involved in a U.S. joint venture with Suntory for home- and office-delivered bottled waters, a European joint venture for the same sort of business and a separate venture with Coca-Cola
All of the to-do over water obscures a business that is otherwise doing all right. Revenue in 2004 was up about 4.3% (net of currency and adjustments), and full-year operating income grew about 6%. Free cash flow also was up for the year (6.5%), and the company hiked its dividend by 10%. With annual growth of more than 10% in the company's core dairy business, there's definitely reason to believe the company can grow beyond its water woes.
While Danone's margins, growth, and return on capital are in line with its peers, so too is its valuation. So while the stock may not be particularly scintillating, the company does offer an interesting lesson in the dangers of trend-chasing. The next time you hear a company's management talking about entering a hot new market, ask yourself whether that company is likely to have a durable competitive advantage and whether or not they'd be better off simply returning that money to shareholders.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.