Is Dean Foods a Buy After WhiteWave's Spinoff?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In October 2012, Dean Foods (NYSE: DF) spun off the organic milk products manufacturer WhiteWave Foods (NYSE: WWAV). Since then, Dean Foods’ share price has increased from $9.50 per share to more than $18.80 per share, while WhiteWave has been fluctuating in the range of $14.60 - $16.75 per share. Should investors be bullish on either WhiteWave or Dean Foods at their current trading prices?

The Divesture and Spin-Off

Dean Foods is considered the leading supplier of branded plant-based food and beverages such as almond, coconut milk, and soy. Previously, it had three reportable business segments, including Fresh Dairy Direct, WhiteWave-Alpro, and Morningstar. The majority of Dean Foods’ revenue, $9.6 billion, or 74% of the total sales, was generated from Fresh Dairy Direct in 2011. At the beginning of Jan 2013, the company announced that it completed the sale of Morningstar Foods division to Saputo for around $1.45 billion. Morningstar Foods is considered the leading provider of extended shelf life creams, beverages, and dairy products. In 2011, Morningstar generated $1.3 billion in revenue and $95.4 million in operating income, or 7% of the total sales. From the sale, Dean Foods expected to receive around $887 million in net proceeds.

As mentioned above, Dean Foods also spun off its WhiteWave Foods, which is the manufacturer of branded plant-based foods & beverages, coffee creamers, premium dairy products, under several brands including International Delight, Silk, Horizon Organic, Alpro and LAND O LAKES. In the last 3 years, WhiteWave has experienced a good growth in both the top line and the bottom line. The revenue increased from $1.45 billion in 2009 to $1.92 billion in 2011, while the operating income grew from $60.5 million to $114.3 million in the same period. 

Much Lower Debt but Low Margin Business

After selling Morningstar and spinning off WhiteWave, Dean Foods is left with the low-margin Fresh Dairy Direct segment. While the operating margins of Morningstar and WhiteWave were 7% and 9.5%, respectively, the operating margin of Fresh Dairy Direct was only 3.6%. Dean Foods’ total debt would be reduced from $3.2 billion to only around $1.2 billion. In 2011, the Fresh Dairy Direct segment generated around $510 million in EBITDA. At the current price of $18.80 per share, the total market cap is $3.5 billion. After adjusting the cash and debt, the total enterprise value would be nearly $4.63 billion. Thus, the market is valuing Dean Foods at around 9.1x EV/EBITDA.

Peers Comparison

Currently, WhiteWave is trading at around $16.70 per share, with a total market capitalization of nearly $2.9 billion. The market is valuing WhiteWave at 12.86x EV/EBITDA. One of its peers, General Mills (NYSE: GIS), is a much bigger company with a market cap of $27.55 billion. With the LTM EBITDA of $3.51 billion, the market is valuing General Mills a bit cheaper at 10x EV/EBITDA. The operating margin of General Mills, 17%, is much higher than the operating margin of WhiteWave at 8%. General Mills’ high operating margin was due to a high operating margin of its US Retail segment, which was the biggest revenue contributor of the company. In fiscal 2012, US Retail generated nearly $10.5 billion in revenue and $2.3 billion in operating profit. Thus, the operating margin of the US Retail segment was 21.9%.

Foolish Bottom Line

Between Dean Foods and WhiteWave, Dean Foods seems to be the good pick at the current price with the cheapest valuation. However, it is left with only low margin milk business after selling Morningstar and spinning off WhiteWave. WhiteWave seems to be a much better business with a much higher margin, but it is a bit richly valued.  I’d rather wait before initiating any positions in either WhiteWave or Dean Foods. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool owns shares of Dean Foods Company and WhiteWave Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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