People that are intolerant to lactose or fearful of the effects of hormones in milk products often turn to Silk soy milk and the single serve Horizon organic milk drinks. These products are made by WhiteWave Foods (WWAV), a recent spin-off from Dean Foods (DF). The company has products in a few niche drink categories such as soy milk, organic milk, and coffee creamers. Importantly, demand for its products is increasing, which bodes well for the company and its shareholders. Let's take a look at the company's valuation and its prospects going forward.
Fundamentals and valuations
WhiteWave has 173 million shares outstanding and only 23 million shares floated on the market for a market capitalization of about $3 billion and an enterprise value of $3.8 billion. The 150 million shares that are not traded on the market are held by Dean Foods. Following a recent favorable tax ruling from the IRS, Dean Foods will make a tax-free distribution of most of these shares on April 23, 2013.
Since WhiteWave was spun-off at the end of October 2012, its shares have appreciated over 4% compared to gains of 8%+ for Dean Foods, 7%+ for Mondelez International (MDLZ), formerly part of Kraft Foods (KRFT), and 10%+ for the S&P 500 Index and a loss of over 12% for Dole Foods (DOLE). Currently, WhiteWave estimates it will earn $0.68 to $0.72 per share in 2013 for a price to earnings ratio of 25.7 to 24.4. This is expensive, compared to the estimated 2013 price to earnings ratios of 17, 18.3, 21, and 14.2 for Dean Foods, Mondelez, Dole, and the S&P 500 Index, respectively. However, this premium could be justified as WhiteWave has a net income margin of 5% compared to profit margins for Dean Food, Mondelez, and Dole of 1%, 4.5%, and 1%, respectively.
Without a doubt, there is a trend to simplify and streamline operations in the food and beverage industry by separating businesses. This is evident in WhiteWave's spin-off from Dean Foods, Kraft's separation of its sweets business, Mondelez, and Dole's recent sale of its Asian operations and global packaged foods business. Strategically, these restructurings make sense as it leaves more focused companies that can focus on fewer core products and operations. In general, investors prefer companies that are easier to analyze and have consistent product offerings. For example, following the sale of its packaged foods business, Dole has become a purely commodity produce oriented company. Similarly, Kraft decided to separate its higher growth confectionery business from its value-oriented basic foods and beverage business.
It seems like the business outlook for WhiteWave is favorable due to recent press about the negative health effects of milk for adults as described in this NY Times article by food guru Mark Bittman. Luckily for WhiteWave, it derives a large portion of its business from non-diary products. The company's break down by region and product type is as follows:
40% of its revenue from European (16%) and North American (24%) sales of plant-based foods and beverages,
36% from North American coffee creamers and beverages, and
24% from North American premium dairy.
I think that the premium dairy business is less prone to any backlash against milk consumption as organic milk is generally healthier. Also, its milk products are largely marketed to children and no one has disputed milk benefits for children yet.
Additionally, WhiteWave may benefit from a decrease in demand for soda drinks. New York City is trying to ban sale of large servings of soda drinks in fast-food restaurants and a number of schools across the country are banning sodas completely from their campuses. All this should benefit producers of plant-based and premium dairy beverages including WhiteWave.
WhiteWave is a leading producer of niche plant-based beverages, premium dairy, and coffee creamers. Its shares are not cheap, but the company has an above average profit margins and it also offers an exposure to a market that is likely to experience secular growth. As April 23, 2013 approaches, the date when Dean Foods will unload over 50% of the company's shares, the common stock price could decline. However, WhiteWave seems like a good long-term investment due mostly to its leadership position in soy milk and single serve premium dairy beverages. Both are products that consumers could be drinking in greater quantities.