Time to Go Dairy-Free?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When a child outperforms the parent, the parent should be proud and maybe a little sad. That is unless it's a company that's competing against its own spinoff. That's the situation with Dean Foods (NYSE: DF) and recent IPO WhiteWave Foods (NYSE: WWAV).
Don't cry over spilled milk
Dean Foods, the nation's largest dairy company, reported Q2 results on August 8. This included the disposition of its entire stake in WhiteWave Foods, bringing in $589 million in net proceeds to be used to pay down debt and taxes, and already lowering their Q4 2012 leverage ratio of 3.54 x to 2.69x. The company also managed to cut costs aggressively, reducing selling, general, and administrative expenses by $43 million and distribution costs by $11 million from the year ago period.
Even spinning it in the best possible light, results were disappointing with operating income at $65 million down from $72 million in Q2 of 2012 and the company announcing it will close 10-15% of its milk plants to offset declining milk volumes. Instead of a $0.30 profit in the same quarter a year ago, Dean Foods reported a net loss of $0.30. On an adjusted basis it earned $0.13 a share, disappointing analysts by a penny. The company guided lower, saying Q3 would be particularly challenging.
Share buybacks and a dividend weren't ruled out for the future, just not in Q3. This is becoming something of a battleground stock with S&P Capital IQ downgrading it to a sell with a price target of $9.00,12% off its close.
As the company is seeing industry-wide declines in milk consumption, a trend that is decades long, this might be a reason to go dairy-free, especially after its spinoff of WhiteWave Foods, which had the nut and soy milks that are becoming ever more popular.
Cutting costs looks like it won't be enough to continue to expand margins. Closing milk plants is just treating one symptom of what is an industry malaise. Selling their fastest growing asset, WhiteWave, was a penny wise pound foolish decision which will likely be sorely regretted. With these kinds of headwinds a dividend initiation seems unlikely.
Volume, volume, volume
WhiteWave confirmed good Q2 numbers on its August 9 earnings release of earnings growth of 28% and EPS at the high end of prior guidance of $0.016. While milk volume was declining at Dean Foods, volumes rose for all categories at WhiteWave. The stock is trading close to its 52-week high of $19.60 and has become something of a momentum stock since its IPO last fall.
The contrast between the two conference calls was dramatic with WhiteWave crowing (I imagine they were crowing, they earned the right) of 12% sales growth in the US and 13% for their European segment, Alpro (plant based milks and yogurts, not pet food). Even their dairy organic milk, Horizon, grew 6%. Revenue came in at $616 million and margin expanded 40 basis points year over year despite increased supply chain costs.
Finally, their specialty drinks and creamers were up with the introduction of a Green Mountain iced-latte line. CEO Gregg Engles said, "We have a robust pipeline of innovation to drive the long-term growth of our platform. Each of our platforms generated very strong top line results, behind continued volume growth in Q2" (source).
Then adding a dollop of great guidance they announced operating income growth would be in the mid-teens. Answering a JPMorgan analyst about growing through acquisition Engles said it's possible, adding, "we have a fantastic balance sheet. We’re less than two and half times leveraged and with growing EBITDA and cash flow, we’re deleveraging that aspect of our balance sheet very quickly."
With cost efficiencies like warehousing and distribution increasingly brought in-house Engles sees margin expansion annually of 50 basis points.
Although the stock has a high P/E of 28.59 its PEG is only 1.53. It is at the forefront of a nutrition revolution, with Engles pointing to the plant-based and Horizon milks as part of a mom's arsenal in the fight for good nutrition.
A burgeoning group of competitors
Competitors include General Mills on yogurt products, Blue Diamond Growers, Danone, Mondelez International, and its most direct competitor Hain Celestial (NASDAQ: HAIN). Although these consumer food giants compete against WhiteWave on some items, Hain competes for the investor dollar of those who want to play the burgeoning healthy eating trend as well as on actual products like yogurt.
Hain has a higher trailing P/E of 31 and a higher PEG of 1.76. However, Hain has a huge portfolio of over 50 brands including their Greek Gods yogurt and rice and soy milks that compete with WhiteWave. Since 1993 Hain Celestial has grown to over 2,000 products sold in 50 countries.
Their buying spree of small accretive companies prompted Barron's to warn last November that a slowdown in Hain's acquisition pace could create a 30% share price decline. But since then Hain acquired a British baby food company and Blue Print, maker of raw fruit and vegetable juices and raw fruit and nut bars.
Analysts expect five-year EPS growth of 16.97%. Hain Celestial has a growing short interest at 21.10%. The stock gained 42.90% over 52 weeks. Its EV/EBITDA is now at 19.90 from 17.70 two months ago and price to book is 3.06. So yes, it's probably overvalued, but it's acquiring strategically. Hain reported record net global sales of $455.3 million for 2012, a 24% increase over 2011 bur after all these purchases has only $0.58 cash per share.
Hain reports earnings on August 21.
Serving it up on a platter
WhiteWave said all the right things on its earnings call and, for former parent Dean Foods, the most discouraging things. With milk volumes down at Dean Foods and the industry and with WhiteWave's premium milk volumes not as high as the plant-based milks, it's clear Dean Foods is fighting a declining trend in dairy milk consumption. WhiteWave, on the other hand is a buy with clear indications the trend is their friend. As for Hain Celestial its fundamentals aren't as strong as WhiteWave's, although it is a name I would drink up cheaper.
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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Hain Celestial. The Motley Fool owns shares of Dean Foods Company, Hain Celestial, 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!