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Background

WhiteWave Foods (NYSE:WWAV) is a diversified food company that engages in the manufacture, marketing, distribution and sale of plant-based foods and beverages, coffee creamers, and dairy products. These products range from soy and almond-based milks to organic milk, yogurt and cheese under various brand names. Some of the more prominent ones include Silk, Alpro (Europe), International Delight, and Horizon Organic. They sell their products to grocery stores, mass merchandisers, convenience stores and health food stores, with Walmart being the largest customer.

The company was recently spun-off from Dean Foods (NYSE:DF) as a way for DF to raise additional cash to pay down their debt and maximize the value of its fastest growing segment. Not only does DF continue to hold about 85% of the outstanding stock in WWAV, but after the final distribution to shareholders in late May, plans to retain about 19.9%.

Summarized Thesis

WhiteWave Foods is a good investment at these levels:

  1. WWAV is drastically undervalued from both a DCF and relative value standpoint. Even using conservative assumptions results in about a 30-35% undervaluation (above).
  2. Dean Foods holds (and will continue to hold) a large stake in the company, so it is in their best interest to support WWAV's stock price and growth efforts.
  3. The company has a strong economic moat, based on a globally recognized brand name, experienced management, and a well-established distribution network, enabling them to be first to market with new products. Their four major brands have at least a 30% market share in their respective subcategories, and continued innovation leads to limited market share erosion.
  4. The markets that WWAV serves, specifically natural and organic dairy products, continue to grow at a rapid pace, exceeding traditional industry averages and leading to robust top line growth. WWAV's product categories are seeing growth rates ranging from 7-12% over the last three years, compared to the 1% overall grocery market growth rate. With a dominant market position in these key segments, they should benefit disproportionately from these consumer trends. Growth comes both organically (60%) and from new product developments (40%), thereby reducing the reliance on potentially overpriced acquisitions to fuel growth. WWAV's organic growth is much higher than competitors such as HAIN.
  5. Many value investors will see the debt and immediately dismiss the company, without doing further research. This debt is in the form of revolving credit lines and bears a blended interest rate of about 2.2% (LIBOR +2-2.5%), with maturities due primarily in 2017 and beyond. WWAV has devoted its excess cash to paying these off as soon as possible, but the debt's effect on the company's short-term liquidity is minimal.
  6. Impending success of new product initiatives and brand extensions will drive growth. The company has launched Silk non-dairy yogurt and ready-to-serve iced coffee, both of which have been well-received by customers. As a first-mover in these segments, WWAV will benefit from brand loyalty and favorable product placement. Management has learned from past successful launches and should be able to continue to implement these strategies in the future.

Valuation

Price Target: $23.11 (+31% upside)

Relative Value/Break-Up Analysis

In performing this analysis, I used a wide range of comparable companies that are similar in size, products and customer base, and then categorized them as either a traditional packaged food company or an organic food company. There were several multiples used: Forward P/E, EV/EBIDTA, and EV/Sales, etc. What I found is that WWAV was trading in the bottom of the group based on sales (1.6x EV/Sales vs. 1.9x average) as well as PEG (1.46 vs. 2.08), and that EV/EBITDA (14.5x), while in the middle, was significantly below the organic food companies (22.9x).

This brings me to my point: not only is the company valued significantly below its peers based on sales, but many view WWAV as a traditional food company when the company derives 64% of its sales from what it considers to be "good-for-you", health-conscious foods. The problem is that since WWAV was spun off from DF, many see it as a company related to DF in its products, when in fact it is not. HAIN, BNNY, and BDBD are the three closest organic food product companies, and the multiples for these organic companies are much higher than the traditional food industry because they offer better growth prospects, in line with those of WWAV. As mentioned above, two of WWAV's businesses, plant-based beverages and premium dairy, are considered natural, healthy alternatives. They comprise 64% of total revenues and were valued using the organic industry's multiples. The remaining 36%, coffee creamers and beverages, was valued using the traditional packaged foods industry multiples listed below.

So, for the base case, I applied the organic industry EV/EBITDA multiple (22.9) to 64% of the company's EBITDA and the traditional packed food industry multiple (11.3) to the remaining 36%, resulting in an 18.7x average multiple. Then applying this 18.7x multiple to WWAV's EBITDA of 254.6m = 4,760m - 762m in present value net debt, divided by 173m outstanding shares to arrive at a price of $23.11 (+31% upside).

Base case: 18.7x EV/EBITDA = $23.11 (31% upside)

The downside scenario is if the entire company is valued as a large traditional food company; applying the 11.3x multiple gives us a price of $12.17 (-30%).

The upside scenario values the entire company at the organic multiple of 22.9x, resulting in a price of $29.26 (+65%).

Applying the same methodology to EV/Sales gives a base case target price of $27.23 (+54%).

DCF: Management has been traditionally very conservative in their guidance, and believes they will see "high single digit" sales growth, which analysts estimate to be around 9.5%. Being even more conservative, I used 9% in 2013 estimates and then lowered it to 8.5% for the remaining stub periods. The operating margin used was 8.0%, based on management's belief that operating income will grow in the mid-teens this year and margins will expand as excess capacity is built out. Management also guided capex to an unusually high number due to its ongoing investment in capacity growth. A WACC was calculated using the company's target capital structure (20/80), the equity market risk premium (6.7%) was estimated using the mean unlevered beta of comparable companies and a market risk premium of 7%, and Hain Celestial's cost of debt (5.98%) was used, which is the closest competitor of WWAV that has outstanding debt. After discounting back all of the cash flows by the WACC, including the terminal value which calculates 2.5% perpetuity growth, I subtracted the net debt and off-balance sheet commitments and determined the fair value of the company to be approximately $19.87 (+12%).

Multiples DCF
DownsideBaseUpside DownsideBaseUpside
EV/EBITDA12.1723.1129.26 16.0719.8723.72
EV/SALES17.3827.2332.77
-9.1%12.3%34.1%
-31.2%30.6%65.4%
-1.7%53.9%85.2%

Relevant Comps

In the traditional packaged food industry:

  • B&G Foods (NYSE:BGS) 1.6B market cap, 13x EV/EBITDA
  • Dean Foods 3.6B market cap, 9.7x EV/EBITDA
  • Flowers Foods (NYSE:FLO) 4.6B market cap, 15.6x EV/EBITDA
  • Hormel Foods (NYSE:HRL) 10.9B market cap, 12.1x EV/EBITDA
  • J&J Snack Foods (NASDAQ:JJSF) 1.4B market cap, 10.6x EV/EBITDA
  • Lancaster Colony Corp (NASDAQ:LANC) 2.2B market cap, 11x EV/EBITDA
  • Post Holdings (NYSE:POST) 1.4B market cap, 10.7x EV/EBITDA
  • Snyder's-Lance (NASDAQ:LNCE) 1.7B market cap, 8x EV/EBITDA
  • Treehouse Foods (NYSE:THS) 2.3B market cap, 10.7x EV/EBITDA

In the organic food industry:

  • Hain Celestial Group (NASDAQ:HAIN) 18.3x EV/EBITDA
  • Annie's (NYSE:BNNY) 32.7x EV/EBITDA
  • Boulder Brands (NASDAQ:BDBD) 17.6x EV/EBITDA

Catalysts

  1. Recent spin-off with a 47% short float. Many investors put on a pair trade believing DF to be undervalued with its 85% interest in WWAV, and as a result went long DF and short WWAV. They believe that at the current levels, DF is trading at the lowest multiple in its history and is therefore undervalued. However, they are severely overlooking the fact that WWAV (and recently sold Morningstar) were the major growth drivers and the reason for the high multiple. Without those businesses, DF is simply a slow-growing company worthy of a lower multiple. The pair trade is wrong in its assumptions and shorts will eventually cover when DF distributes the additional 60% of the outstanding stock (bringing its ownership under 20%) at the end of May. A major short squeeze will result, and many funds will begin building positions via this distribution. This is the biggest catalyst. From reports I read, investors are shorting not because they doubt WWAV's growth prospects, but because they want to own the DF stub based on the belief that it is undervalued, and the only way to do this is to short out the company's WWAV ownership.
  2. Expansion into additional channels, such as away-from-home, convenience stores, drug and dollar stores, and the food service channel. Traditionally, WWAV has primarily served grocery stores and mass merchandisers. Also, expansion into Eastern Europe as a potential first-mover seems promising. The soy-based alternative to both milk and yogurt is significantly lower as a percentage of sales in this region, as it compares to Western Europe. They also recently introduced almond and hazelnut milk to the European markets as an alternative to soy.
  3. Increased household penetration. WWAV's brands, namely the ones in the plant based beverages and premium dairy, have incredibly low penetration rates compared to traditional milk, mainly because these products were previously seen as "needs" for those who are lactose intolerant. However, recent introduction of almond and coconut-based milks has pushed these products in the direction of "wants", as healthier, natural, and good tasting alternatives to traditional milk. Growing household acceptance will lead to increased demand. With market leading brands, the company is positioned to capture a disproportionately large share of this industry growth.
  4. Margin expansion. Current capacity bottleneck affecting bottom line. WWAV is investing in manufacturing facility expansion over the next year since it is operating at maximum capacity, and as a result, suffers from unusually high storage costs with co-packers. This problem should be resolved as the bottleneck is fixed towards the second half of the year, allowing for potentially greater top-line growth and lower costs. In other words, the company is experiencing such high demand that they lack the internal warehousing to store their finished goods. The completion of this facility will result in additional cost synergies and margin expansion. WWAV is operating at one of the lowest EBIT margins (8%) in its peer group (11% average) and it should be able to achieve operating improvements as it leverages its growing asset base to achieve economies of scale.

Industry

As far as the industry goes, WWAV has been positioning themselves as the leading brand in some of the fastest growing product categories in the world.

Sales breakdown:

  • North America plant-based food and beverage (24%) -> Silk
  • Europe plant-based food and beverage (16%) -> Alpro
  • Coffee and creamers (36%) -> International Delight
  • Premium dairy (24%) -> Horizon Organic

The plant-based food and beverage industry has an 8% compound annual growth rate (OTCPK:CAGR) with growing household penetration (16% in 2009 to 25% in 2012) and an increased customer focus on the nutritional benefits of their purchases. Within this industry, almond beverages (16% CAGR) represent one of the fastest growing segments in the US, providing WWAV's North American plant-based segment with 20% growth. Silk controls a 57% market share of the $1.1B industry in the US, while Alpro maintains a 38% share in Europe.

The coffee creamers and beverages industry has a 9% CAGR, with flavored creamers and ready-to-drink beverages growing at 14%, which are the segments WWAV targets under the name International Delight. A recent study shows that while 64% of all adults (18+) in the country drink coffee, only 22% prefer to drink it black, with no additives. WWAV's International Delight holds a 30% market share in coffee creamers, a $1.7 billion subcategory, and has seen sales growth in the high teens for the full year as a result of its ready-to-drink iced coffee launch.

The premium dairy industry is growing at a 7% rate, but within this is organic milk which has seen 10% yearly growth. WWAV notes a growing interest in organic milk because it is produced without pesticides or growth hormones, and therefore resonates with health-conscious consumers. Organic milk represented 6.9% of all milk sales in 2009 and now has 8.2% as of 2012. Here it is worth noting that WWAV's brand, Horizon Organic, has a 43% market share in organic milk, a $1.3 billion industry.

Competitive Advantages

I believe the company holds a competitive advantage based on brand name, its established distribution and supplier network, and product innovation expertise.

The four aforementioned products, Silk, Alpro, Horizon Organic and International Delight, are the company's four biggest sales drivers and all maintain a dominant position in their industry. The first three have a market share that is at least four times bigger than the next competing product, and International Delight ranks second overall, behind Nestle's Coffee Mate. This in itself is a major competitive advantage due to the associated brand recognition with the products, which stems from product innovation with respect to brand extensions and from being a first-mover. Based on reviews, customers favor WWAV's products over its competitors because of their stable shelf lives, product consistency, taste, and variety of offerings. Many also purchase their products because of the health benefits. For example, Silk is preferred by those who are lactose intolerant, dislike the taste of regular milk, or are simply looking for a nutrition boost since the product has more calcium and fewer calories than regular milk.

In addition, WhiteWave is able to leverage its extensive supply chain network to both market and distribute its products in a timely fashion, leading to high product-turnover rates and vast economies of scale. They currently operate five manufacturing plants, two distribution centers and three strategic co-packers in the United States, and source their materials from farmers throughout the country.

The company's downstream operations rely on a sales force and long-running relationships with independent brokers. Having its own sales force enables them to establish collaborative partnerships and facilitate favorable terms and shelf placement. So from a value chain perspective, it appears they are well-established within the industry, and a new entrant would have a difficult time coming in and securing these relationships.

WWAV continues to invest money into marketing and product development and has been extremely successful in gaining traction. They conduct focus group studies and consumer taste tests, gaining valuable direct consumer input in order to develop marketing strategies and single out the products most likely to be successful. Two prime examples of this are Silk PureAlmond, which was launched in 2010, and International Delight CoffeeHouse Inspirations in 2009, both of which ranked in the top 3% of all consumer packaged food and beverage launches in the United States, which is measured in terms of the first twelve months of the product's sales. Along with this organic growth is a series of brand acquisitions over the last decade whose products the company was able to more efficiently produce and distribute across different geographic markets.

Management

Fueling these growth efforts is a management team with decades of experience in the consumer packaged food and beverage industry. The CEO, Gregg Engles, has 24 years of experience building the Dean Foods product portfolio and turning it into a multi-billion dollar company. In addition, several other executive officers were founding members of the team that built WhiteWave through brand acquisition, or were early employees who have led it to its subsequent growth.

Conclusion

Obvious risks are present with the DCF analysis, so I tried to shy away from it except to show that even using the most modest growth projections, the company is significantly undervalued. The bigger argument lies in both WWAV's industry classification from a relative value standpoint, and its domination of fast-growing markets where it holds a strong competitive advantage in both the United States and Europe. There are many short-term catalysts, listed above, that should help propel WWAV to its target price of $23.11 within the next 12 months.

Risks

  1. Company continues to experience capacity issues and as a result, suffers from higher storage costs and lower margins.
  2. There may be a lack of fund accumulation when DF shareholders begin selling their distribution, shorts do not cover, and price remains depressed.
  3. Product innovation fails to generate new revenue streams.
Source: White Wave Foods: 30% Undervalued