Bumpy Road For This Special Situation

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

On Feb. 13, 2013 Dean Foods (NYSE: DF) investors were jolted by a worse-than-expected fourth quarterearnings report that sent the company’s stock down by as much as 11 percent over the course of the day. At the close, Dean Foods had logged an 8 percent loss on the session. The stock has continued to fall on subsequent trading days. Recent Dean Foods spin-off WhiteWave Foods (NYSE: WWAV) also fell heavily on its own worse-than-expected earnings report.

However, WhiteWave appears to be in a better financial position than its former parent. Given the long-term secular hurdles that Dean cited in the note that accompanied its report, it may be in for a bumpy ride over the next several years. Dean’s one trump card is the 86 percent stake that it retains in WhiteWave. It has indicated that it intends to sell off most of the rest of this stake. Depending upon the market climate for its mainstay milk products during the coming years, Dean may be forced to divest entirely from the up-and-coming organic food processor. It was recently revealed that the company plans to make controlled sales of WhiteWave shares for the next several months.

About Dean Foods and WhiteWave

Dallas-based Dean Foods is a major dairy distributor that processes and sells a wide variety of milk, cheese and cream products. Its offerings include pasteurized milk, ice cream, cheese, coffee creamers and whipped toppings. In addition, it manufactures various processed cheese and ice cream products. Dean also sells a variety of fruit-based and preserved products, including fruit juice, iced tea and flavored water drinks. The company has a current market capitalization of about $3 billion and an enterprise value of about $6 billion.

Also based in Dallas, WhiteWave Foods engages in many similar endeavors. However, its product lineup is somewhat more diversified than that of its former parent and includes a significant amount of organic and health-conscious offerings. It manufactures healthy dairy alternatives like soy milk, almond milk, rice milk and almond milk under the Silk and Alpro brands. It also offers a variety of organic dairy products like yogurts, regular milk and cheeses under the Horizon Organic label. Finally, it owns the popular Land O’Lakes butter and margarine brand. WhiteWave has a market capitalization of about $2.6 billion and an enterprise value of $3.3 billion.

Plans Regarding Remaining WhiteWave Stake

After Dean Foods’s unexpectedly bad earnings report, clamors for the company to sell a portion of its remaining stake in WhiteWave became louder. Dean’s management team has indicated that it intends to retain at least 20 percent of WhiteWave’s outstanding shares on a long-term basis.

However, these plans may now be in jeopardy. Although it has not officially changed its tune, there may be signs that Dean’s management team is weighing its pressing need for cash against WhiteWave’s strategic utility as a foothold in the fast-growing organic dairy market. Even before the company’s disappointing earnings announcement, reports leaked that the company could offload the entirety of its WhiteWave shares. Given that its former subsidiary is currently valued at around $3 billion, such a move could raise a significant amount of cash for Dean Foods.

Long-Term Prospects and Outlook

Investors were not particularly concerned about Dean Foods’s actual fourth-quarter 2012 earnings results. Rather, many Dean shareholders failed to anticipate the company’s dire warnings of a secular sales slowdown that could afflict the company for years to come. They may also have been shocked by the scale of its planned plant closings and distribution-route consolidations. In the report, the company indicated that it needed to close at least 10 processing facilities. Although no official announcements about potential job cuts have emerged from Dean’s corporate office, it is presumed that they are coming.

In its report, Dean cited such factors as perennially-high milk prices and low retail margins. Most disturbingly, it also pointed to a declining U.S. birthrate as evidence that demand for basic milk products would remain low for years to come. A potential long-term drop in the number of immigrants that enter the United States each year could also affect the company’s sales figures. Since relatively young immigrants tend to bear children at higher rates than their U.S.-born peers, tight federal immigration restrictions could seriously impact Dean’s margins.

In short, Dean Foods faces significant challenges in the coming years. While the company’s stake in WhiteWave looks to provide it with some revenue growth and has the potential to be used for emergency cash infusions, it may not be enough to drive sustained earnings growth. Although WhiteWave is not without its problems, it appears to be in better shape than Dean. As such, investors who wish to play in this space might prefer to bet on Dean’s former subsidiary.  More on trading this special situation coming 

mthiessen 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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