The Latest and Greatest Spin-Off Opportunity
Cultivating and selling food is a tough business. It is associated with brutally low margins, government intervention, and acts of God. Even companies that are often considered "cartels" often struggle to maintain profits. There is a haven, though, in food production, and you are well aware of it. The organic and health food movement has driven fantastic profits for the producers and retailers involved in the business. Now, a long-established food company is readying to spin off its most profitable arm, and this arm is deep in the organic profit pit.
The organic money tree
Whoever said money does not grow on trees was kind of lying to you. It does, but only recently. As holistic practices continue to take hold in Western society, corporations have followed suit and have provided our food markets with countless products stamped with the word "organic." Say what you will about the validity of this label, these food products command substantially higher prices and margins for the food producers and retailers.
Just look at Whole Foods Market (NYS: WFM) and The Fresh Market (NYS: TFM) . Both companies are painted with a sustainable hue, both have absolutely gorgeous stores that encourage us to spend the extra dollars, and both have industry-leading operating margins -- 6.25% and 7.84%, respectively. If one wants to be in the business of food, the only place to be is in organic and health-focused.
An old dog with new tricks
Dean Foods (NYS: DF) was founded in 1925 as a bread-and-butter American food company. Originally under the name Suiza Food Company, but changing in 2001 to Dean Foods after a merger, the company sells mainly dairy and dairy-related products. It also operates the Morningstar brand, selling extended-shelf-life products (i.e., frozen food). The WhiteWave-Alpro segment manufactures and sells standard and organic dairy, as well as dairy-alternative products such as Silk -- a soy milk. Annual sales for the segment are up 64% in the last five years. The nonorganic segment within has grown 24% in the same period. WhiteWave represents only one-fifth of total sales for Dean, but accounts for 40% of operating profit.
Luckily for investors, WhiteWave is the division of Dean readying to be spun off.
Many investors have had an interest in Dean Foods for quite some time -- and it's largely due to the WhiteWave-Alpro division. Soon, we will be able to jettison the lower-margin business and focus our investing dollars on the real moneymaker within Dean.
In case you're not convinced yet
Let's compare WhiteWave's high-margin, fast-growing business with that of Dole Foods (NYS: DOLE) , a mainstay in fresh produce production. Dole's profit margin is at 0.52%. Operating margins aren't too much better at 2.68%. The company has to fight rising input costs as human rights organizations demand better treatment of workers and the environment, while banana prices remain incredibly low.
The company has had to switch gears and focus on supplying grocers with in-house private labels, which are increasingly more profitable than the branded names.
In the meantime, WhiteWave sells organic milk -- a product that sells for a dollar higher than its standard competitor. With a half-gallon of milk at an average price of $2.27, that is a 70% premium. Organic milk does require organic feed for the cows, which is obviously more expensive, but prices only seem to tick up for organic goods.
Dole, along with competitors Chiquita and Del Monte Foods, faces lawsuits and a deteriorating business climate, yet all three are often considered value stocks. True, they tend to trade cheaply compared to other food producers, including Dean Foods, but their business is much more volatile and with such low margins that small events can cause net losses quarter after quarter, year after year. Dean's WhiteWave, when it spins off, likely will command a premium in stock price, but will offer investors a fast-growing business with a product that the average consumer is increasingly willing to pay extra for.
An investment in the upcoming spinoff has the potential to help your portfolio help you into a nice and easy retirement. In addition to WhiteWave, take a look at these three stocks that our analysts believe will help you retire rich. The report and advice are free for a limited time.
The article The Latest and Greatest Spin-Off Opportunity originally appeared on Fool.com.Fool contributorMichael Lewisowns none of the stocks mentioned above. You can follow him on Twitter@MikeyLewy. The Motley Fool owns shares of Dean Foods and Whole Foods Market.Motley Fool newsletter serviceshave recommended buying shares of Whole Foods Market and The Fresh Market. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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