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I am an author of books related to the decision framing and optimizing processes of Buffett and Munger. These books are available at www.frips.com and: http://www.amazon.com/Bud-Labitan/e/B002D1ERT4 With integrity and patience, we can also earn superior profits by carefully evaluating facts and... More
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The Four Filters Invention of Warren Buffett and Charlie Munger
  • A Value Guy looks at Dean Foods Co., DF 0 comments
    May 10, 2010 7:07 PM | about stocks: DF

    Dean Foods Co.
    5/10/2010
     
    Dean Foods Company is a food and beverage company. The Company operates through two segments: Fresh Dairy Direct and WhiteWave-Morningstar. Fresh Dairy Direct, formerly DSD Dairy, is a processor and distributor of milk and other dairy products in the United States, with products sold under more than 50 local and regional brands and a range of private labels. WhiteWave-Morningstar markets and sells a variety of branded dairy and dairy-related products, such as Silk soymilk and cultured soy products, Horizon Organic milk and other dairy products, The Organic Cow, International Delight coffee creamers, LAND O’LAKES creamers and fluid dairy products, and Rachel’s Organic dairy products. WhiteWave-Morningstar also offers branded soy-based beverages and food products in Europe, marketing its products under the Alpro and Provamel brands. In July 2009, the Company completed the acquisition of the Alpro division of Vandemoortele, N.V.
     
    Last Price 10.47
    52 Week High 22.09

    Does DF make for an intelligent investment or intelligent speculation today?

    Starting with a base estimate of annual Free Cash Flow at a value of approximately $390,000,000 and the number of shares outstanding at 181,500,000 shares; we used an assumed FCF annual growth of 4 percent for the first 10 years and assume zero growth from years 11 to 15.  Review the Free Cash Flow record here:

    http://quicktake.morningstar.com/stocknet/CashFlowRatios10.aspx?Country=USA&Symbol=DF

    The resulting estimated intrinsic value per share (discounted back to the present) is approximately $27.6.

      Market Price = $10.47
      Intrinsic Value = $27.6  (estimated)
      Debt/Equity ratio = 3.13
      Price To Value (P/V) ratio = .38  and the estimated bargain = 62. percent.

    Before we make a purchase, we must decide ( filter #1 ) if DF is a high quality business with good economics. Does DF have ( filter #2 ) enduring competitive advantages, and does DF have ( filter #3 ) honest and able management.

    The current price/earnings ratio = 10.4
    It 's current return on capital = 3.8-1
    Using a debt to equity ratio of 3.13, DF shows a 5-year average return on equity = 17.3

    Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

    Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

    Does DF make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

    Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is DF the best place to invest our money today?

    TIME FORWARD PROJECTION:

    How will DF compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

    In summary, using a debt to equity ratio of 3.13, DF shows a 5-year average return on equity = 17.3 . Based on a holding and compounding period of 10 years, and a purchase price bargain of 62. percent, and a relative FCF growth of 4 percent, then the estimated effective annual yield on this investment may be greater than 14.2 %.

    Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon?

    As always, I appreciate hearing your views,

    Bud Labitan
    Author of the new book 'Price To Value'
    http://www.amazon.com/Price-Value-Bud-Labitan/dp/0557317185

    Author of 'The Four Filters Invention of Warren Buffett and Charlie Munger'
    http://www.amazon.com/dp/0615241298

    Labitan Partners
    budlabitan@ aol.com
    www.frips.com

     



    Disclosure: no positions
    Themes: valuation Stocks: DF
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