Consumers are shifting their food preferences to healthier foods and snacks, prepared foods, and snacks that are eaten in smaller portions, more frequently and “on the go.” These trends are having an impact on the profitability and the prospects of global food companies.

Nestlé SA of Swit-zerland, Groupe Da-none of France and Dean Foods Co. of Texas are doing very well because of these recent shifts. Nestlé makes the tremendously popular Perrier sparkling water; Danone produces bottled water and yogurt, two of the most popular such food items; and Dean is a dairy products company.

However, the growth of this sector doesn’t necessarily mean clients should be urged to invest in all of these companies right away. Although a number of global managers and investment research houses recommend Nestlé, they consider Danone too expensive; Credit Suisse Group of Switzerland has a hold on Dean. The problem for Danone and Dean isn’t their prospects but, rather, their valuations, which either fully reflect or have gotten ahead of prospects.

Here’s a closer look:

> Nestlé Sa. Charles Burbeck, head of global equities at HSBC Halbis Partners in London; Patricia Fee, a money manager at IG International Management Ltd. in Dublin; Bernstein Investment Research and Management in New York; and UBS Investment Research in London all recommend this company.

In addition to Perrier, Nestlé has a variety of other food products, including chocolate, coffee, tea, instant milk, ice cream, prepared foods and high-end pet foods, the last of which is a category experiencing growth as people spend more on their pets. Nestlé also has a 27% stake in French-based cosmetic firm L’Oréal Group and a 75% stake in eye-care company Alcon Inc. of Switzerland.

Nestlé gets at least 30% of its earnings from emerging markets, in which it is selling high-end products — and, says Burbeck, it’s quite unusual to find a company of this magnitude selling such a high proportion of its goods in emerging markets.

Nestlé reported net income of 4.5 billion Swiss francs (US$3.5 billion) in the six months ended June 30, vs 4 billion Swiss francs in the same period a year prior. Sales in the first half of 2006 were 47.1 billion Swiss francs vs 42.5 billion a year earlier. As of June 30, there were 7.4 billion Swiss francs in long-term financial liabilities and 5.6 billion Swiss francs in employee benefit liabilities.

In mid-October, the widely held shares — 383.8 million — were trading at 437 Swiss francs a share, or about 17 times estimated 2007 earnings. They trade on the Zurich Stock Exchange and are also available over the counter in New York as American depository receipts, with one ADR equalling one-quarter of an ordinary share.

In reports issued in September, Bernstein and UBS set a 12-month share price target of 500 Swiss francs and 485 Swiss francs, respectively.

Fee thinks there is a 10% upside potential this year and a further 5%-10% if the company meets its financial targets, although she is skeptical that will happen.

Burbeck expects double-digit annual earnings growth over the next few years.

Operating margins are about 12%, vs an industry average of 8%, and return on equity is 18% — both of which Burbeck expects to rise.

Fee expects 12%-13% EPS growth and thinks this justifies a small premium on the stock.

Bernstein “continues to be impressed with the quality of Nestlé’s vision, strategy and management.”

UBS says Nestlé is trading at a 20%-30% discount to other consumer growth stocks, and thinks sales growth will probably be 5%-7% over the medium term rather than the 5%-6% Nestlé is targeting.

> Groupe Danone. Only Burbeck believes this company’s shares, which are trading at 21 times 2007 earnings, are currently worth buying. He notes there have been persistent rumors of a takeover bid, probably by a U.S. firm. There haven’t been U.S. companies in this growth category and he thinks they’d pay a premium for Danone’s water and yogurt businesses.

Danone reported net income excluding unusual or non-recurring items of 745 million euros (US$916 million) in the six months ended June 30, vs 444 million euros a year earlier. First-half sales were 7.2 billion euros, vs 6.4 billion euros a year earlier. Net debt was 3.6 billion euros as of Dec. 31, 2005.

@page_break@Danone has three business lines: dairy is the biggest, with sales of 4 billion euros (or 55% of total revenue) in the first six months; bottled water sales were 2 billion euros (28% of the total); biscuits and cereal products garnered 1.2 billion euros (17%).

Danone’s dairy business, which is almost entirely yogurt, has done very well. It has been successful in North America, where yogurt consumption is less than that of Europe.

Burbeck calls bottled water “a fantastic business” that ties into the healthy lifestyle trend. And Danone has very good brands, including Evian, which has the highest margins and isn’t affected by competition from lower-end brands. Again, the firm has been clever at marketing this product and there’s more growth to come in North America and Asia, as well as in Europe.

Danone is also doing reasonably well in biscuits and cereals; it has been introducing healthier biscuits, says Burbeck.

The operating margin is 12%-13% and ROE is more than 30%.

Burbeck thinks EPS should grow by at least 10% a year over the next three to five years, partly because of growth in North America and emerging markets.

UBS is impressed by the solid margin progression in spite of higher raw materials.

But Bernstein believes margins may disappoint in the medium term. Although Bernstein agrees that Danone is a strong company operating in growth segments, it reports the firm’s stock deserves only a 10% premium, vs the current premium of more than 30%.

Fee agrees: the company has strong management and a very good track record, but it is too richly priced for her now. The share price was recently 112 euros on the Paris Bourse.

UBS’s 12-month target price in early August was 110 euros; Bernstein predicts it will fall to 85 euros; and Fee won’t buy it until it gets to 90 euros or less.

As of Dec. 31, 2005, there were 264.2 million widely held shares outstanding. The company also has American depository shares trading on the New York Stock Exchange. (One ADS equals one-fifth of an ordinary share.)

> Dean Foods Co. Dean reported net income of US$81.7 million in the six months ended June 30, down from US$143.1 million the year before. The decline reflects US$47.8 million in losses from discontinued business, which had contributed US$18.4 million to net income in the first half of 2005. Net sales this year were virtually unchanged at US$5 billion. As of June 30, long-term debt was US$3.2 billion.

The company produces a variety of milk- and soy-based dairy products. The bulk of the company’s sales are in the U.S., with some in Europe, primarily Britain.

Dean’s operating margin is 6.2% and its ROE 14.4%. Burbeck says it’s a nice steady growth business with potential earning growth of 12%-13% a year because consumption of organic and soy products, as well as yogurt, will grow substantially in North America in the next five to 10 years. The only problem, he says, is that the price of milk is volatile, although Dean has mostly been successful at passing on cost increases.

Credit Suisse, however, warns in a September report that Dean’s cost base is “inherently volatile,” pointing to its November 2005 reduction of earnings guidance and two 2004 profit warnings, one in May and one in August. However, Credit Suisse does believe Dean has “significant” opportunity to make its back office and procurement more cost-efficient.

Dean has 133.2 million widely held shares outstanding as of June 30 trading on the NYSE. Recently trading at US$41 a share, or 20 times earnings, the stock is already at Credit Suisse’s 12-month target.

Other analysts agree the price is quite high. IE