In the Spotlight - Water a "Big Beat" for Danone's Q1

Danone has made a positive start to the year thanks to resurgent bottled water sales, which helped it to beat analyst estimates and sending shares climbing.

Danone's share price rose by 1.4% in early morning trading yesterday (14 April), outperforming the Stoxx European food and beverage index. No wonder, given that the Evian bottled water producer recorded a 19.6% rise in group sales.

Analysts have hailed this as Danone's best quarterly performance for three years.

A particular cause for celebration was the firm's water division, which appears to be on the road to recovery. For the three months to the end of March, Danone saw sales growth in its waters division of 13.3% to EUR718m (US$1.04bn). The division put in "an exceptionally good showing", the food and drink giant said, boosted by a 10.7% rise in volumes.

"The first quarter has been a cracking start," Evolution Securities' analyst, Warren Ackerman, told Bloomberg, with an "overweight" rating on the company. "Water was the big beat," he said.

Danone said that pricing for bottled water is growing again in developed countries. Shipments rose in all regions, though particularly in emerging economies. Water sales accounted for around 17% of Danone group sales in 2010.

Morningstar analyst, Philip Gorham, agreed that the first quarter marked a strong start to the year for Danone.

"The 20% increase in revenue was slightly above our forecast because of favourable currency movements," he said.

However, like many major beverage firms, Danone has said that it expects raw materials prices to continue to rise and be volatile for the remainder of 2011. The firm faces cost inflation of around 9% this year, which means it must raise prices by between 3% and 4% in order to preserve margins.

Gorham was confident on the firm's ability to withstand the pressure. "We are encouraged by Danone's ability to raise prices and still increase volume in all segments except medical nutrition," he said.

Danone has stuck to its target of a rise in like-for-like sales of between 6% and 8% for the full-year.

"In an environment which remains complex our current sales trend allows us to stand by our targets," said Danone's chairman and CEO, Franck Riboud. Early momentum, then, has put the company in a good position.