Lindt

Stock price: SF27250
Conclusion: Premium price for a premium chocolate brand. Lindt seems fully priced based on our valuation range of SF25000-SF26000 per share.

2009 results: sales down 1.9% to SF2.52bn, up 2.3% like for like. EBIT down 25% to SF265m. EPS down 25% to SF850 per share.

Further headwinds in 2010.
-We expect a return to 5% growth, the low end of management expectations for 2010 (+5-7%). Volume growth should be held back by continuing weakness in Western Europe, while price increases could be lower than in 2009 (+2.5%) due to competitive pressure.
-The strength of the SF might impact sales by nearly 3% based on current rates.
-Gross margin will be once again affected by higher cocoa pricing partly offset by lower prices for cocoa butter.
-Management’s priority is to increase market share, which might require additional promotional activities and a step-up in media spending.
-Nonetheless, EBIT will benefit from the savings attached to the reorganization of the US retail network, logistics optimization in Italy, SAP implementation and lower one off impairment charges (one off charges accounted for SF40m last year).
-We think EBIT could achieve SF335m and net earnings bounce back to SF252m (EPS +30%)

Premium positioning offers double digit long term growth
-Premium chocolate should continue to expand at a faster rate (+5% pa) than standard products (up 1-2% pa). The segment accounts for 25% of the total market estimated at SF38bn, but is still underdeveloped in major markets such as the US or UK. New geographies offer untapped potential, notably Russia, China, even Japan.
-Lindt holds a leading position in premium chocolate which should help it to resist to the consolidation that has taken place in the industry.
-Lindt can rely on strong positions in Europe, but also in North America which account for almost 30% of its sales, including Lindt and the Ghirardelli brand.
-We think that the long term guidance of a return to 6-8% growth in sales and 8-10% growth in EBIT looks reasonable.
-We expect the net cash position to rise to almost SF500m by the end of 2010 and almost SF600m by 2011. The chocolate industry remains fragmented with the top 7 players accounting for less than 60% of the total market. Lindt could make bolt on acquisitions of local brands in order to accelerate its penetration of emerging markets.

Lindt trades at 24.7x and 22xP/E based on our 2010 and 2011 estimates, implying 40% premium to the European food sector. Such a premium looks difficult to justify, even based on highly challenging long term assumptions (+7-8% growth and 15% margin by 2016). Although, investors seem to anticipate further consolidation in the sector, we think Lindt positioning should enable it to remain independant in the near future.

Lindt

Stock price: SF26470
Conclusion: Lindt’s unique premium positioning and long term earnings growth potential largely priced in. Lindt’s stock price exceeds our valuation range of SF22-23000 per share.

2009 sales: SF2.52bn (-1.9% reported), up 2.3% like for like. 2009 EBIT at the low end of the SF260-280m range. 2010 guidance: H1 to remain difficult.

2% growth (mostly pricing) at a time when competitors are reporting downtrading from consumers is not so bad. Lindt succeeded in gaining share in the US market, which is still underdeveloped compared with Western European demand which suffers from negative consumer sentiment.
Growth in 2010 should once again be held back by an adverse consumer environment. In addition Lindt remains underexposed to emerging markets.

Marginwise, we expect Lindt to continue to suffer from high cocoa prices, up 30% in a year. Material costs could go up by 200bp-300bp relative to sales.
In addition, we expect market investments to remain high (above 30% of sales), in order to sustain Lindt’s premium positioning. As a result, we think the expected return in 2010 to 2008 earnings level, following our estimated 27% decline in 2009 EPS looks highly challenging.

23xP/E based on 2010 forecast looks very generous considering the low visibility for 2010. EV/EBITDA multiple is almost in line with the 13x multiple paid by Kraft for Cadbury..Although we understand why Lindt should incorporate some speculative premium, we feel it is largely priced in.