By Matt Doiron
Shares in Dean Foods Company (DF) popped over 40% on Wednesday after the $3.2 billion market cap dairy company beat earnings expectations by over 15%- which it had also done in the last three quarterly reports- and announced its plans to spin off part of its WhiteWave business unit, which among its offerings provides more premium product lines such as organic dairy and soy-based dairy substitutes, in an IPO. The company also increased its earnings guidance for the fiscal year. The stock had rallied from $11 to $17 in early July before plunging to about $12 before the quarterly report came in; it closed on August 8th at $17.46.
Dean Foods Company's reported earnings of 36 cents per share was double what the company had earned in the second quarter of FY 2011. Revenue did fall compared to the previous year, but this was primarily due to lower milk prices (which, of course, had the effect of reducing the company's costs and contributing to its earnings boost). The company did finish the quarter with comparatively little cash on hand compared to its debt burden, but part of the strategy behind the WhiteWave IPO is to use the expected proceeds to pay down debt. Because of this spinoff, investors may want to pay attention to Dean Foods as spinoffs have the potential to create value - the management of the newly independent company can focus on corporate policies which are best for that business unit and increase its value above what it was as part of a larger organization.
Among the hedge funds who reported positions in Dean Foods Company at the end of the first quarter were billionaire David Tepper's Appaloosa Management and Cliff Asness's AQR Capital Management. Appaloosa owned 4.4 million shares after having reduced its position over the last year (see more of billionaire David Tepper's stock picks); AQR Capital Management increased its position to just over 1 million shares (find other stocks in AQR Capital Management's portfolio). We would expect more hedge funds to take a look at Dean Foods as it prepares its spinoff.
With the increase in its stock price, Dean Foods now trades at 13 times its expected earnings for fiscal year 2013 and a five-year PEG ratio of 0.6. This seems like a quite reasonable multiple for a consumer staples company, even without considering the effect that a spinoff might have. Unfortunately, Dean Foods is larger than its public pure-play dairy peers, and its other pure-play dairy peers are private, but it can still be compared with food companies that provide basic consumer staples (with the understanding that Dean Foods is more exposed to swings in dairy prices). Kraft (KFT) trades at a forward P/E of 15 but its five-year PEG ratio is 1.5. Kraft should also be noted by conservative investors for its remarkably low beta of 0.3. We would also compare Dean Foods to meat and bakery player Hillshire Brands (HSH), whose forward P/E multiple comes in at 16. Finally, Heinz (HNZ)'s business has been struggling recently, with earnings falling compared with a year ago, and carries a forward P/E of 15.
We look at Dean Foods against larger, more diversified food companies and it seems to be priced in the same range even after its large price increase. True, because Dean Foods is more concentrated in dairy products it faces more commodity risk, but the spinoff of a business unit is at least an event to watch. Investors may want to take a cue from spinoff research and get into the stock at a price competitive with its peers, and even if they are avoiding the stock for now should consider buying shares of WhiteWave once it becomes a stand-alone public company.