It's time for an update on Dean Foods (NYS: DF) and its recent spinoff, WhiteWave Foods (NYS: WWAV) . Dean announced the spinoff in early August amid much fanfare -- in fact, the stock had gone up more than 50% between the announcement and the first part of the spinoff. Clearly, the market is excited, and so am I. Read on to see why I recently placed an outperform CAPScall on Dean Foods, and why I'm doing the same for WhiteWave.
Riding the wave to profit
The spinoff is occurring in two parts. WhiteWave had its IPO last Friday and is now organizationally a separate company, but Dean will continue to own about 86.7% of the company for at least a six-month lockup period, after which Dean plans to distribute the rest of the shares to Dean shareholders as a tax-free distribution. On Friday, Dean's current CEO became CEO of WhiteWave, and its chief supply-chain officer and president of the Fresh Dairy Direct segment became the new CEO of Dean.
When a current CEO switches over to a new spinoff, that's a pretty big vote of confidence in the future of the spinoff versus the parent -- and there's good reason here. WhiteWave has been Dean's fastest-growing segment, with 55% net income growth over the past five years. In 2011, WhiteWave provided about 16% of Dean's revenues, but 31% of its operating income. And unlike a lot of spinoff situations, Dean isn't using WhiteWave as a convenient place to dump its large debt burden.
To put it bluntly, the future of grocery retailing is organic. WhiteWave's Horizon Organic and Silk brands make it the largest supplier of organic and alternative milks. Silk alone has 75% of the soy milk market and is expanding into almond milk with much success. The comparison between WhiteWave's sales growth and Dean's as a whole is similar to that of Whole Foods (NAS: WFM) , a proxy for organic grocery retailing in general, and the more conventional Safeway (NYS: SWY) :
WhiteWave has only given pro forma earnings per share for 2011, but it has given net income per share, which is slightly different. In any case, at Friday's closing share price of $16.75, the company is selling for only 27 times net income, a pretty cheap price for such a fast-growing company. Compare that with Whole Foods at 40 times earnings and Annie's (NYS: BNNY) at 292 times earnings.
But what about Dean?
As mentioned, Dean currently still owns about 86.7% of WhiteWave. Because a value can now be attached to WhiteWave, it's possible to figure out that Dean's WhiteWave holdings account for about 42% of Dean's enterprise value. If you take that out -- which you'll have to in a few months anyway -- and also take out the free cash flow provided by WhiteWave, you'll arrive at an enterprise-value-to-free-cash-flow ratio of only about 15. Dean is also looking to sell its Morningstar unit for $1 billion to $1.5 billion , and while it's hard to say exactly how much free cash flow the unit provides, a $1 billion cash infusion would certainly be welcome.
Ultimately, that would whittle Dean down to just one of its operating segments -- Fresh Dairy Direct, its biggest and most volatile segment. This segment has taken it on the chin over the past few years, with operating income falling nearly 50% from 2009 to 2011, despite a 13.5% rise in sales. As with many farm companies, this situation is largely outside Dean's control. Milk production is mostly dependent on corn for cattle feed, and corn prices have recently gone so high that some farmers are literally feeding their cattle discarded candy .
On the upside, however, the recent management shakeup will bring Fresh Dairy into focus. Despite the segment's difficulties, it still manages to outperform competitors in the milk industry , and having the president of the segment move up to CEO of the company will keep expertise in place.
The Foolish bottom line
WhiteWave is a clear buy for me. With its dominance of both organic milk and alternatives such as soy and almond milk, it stands to take advantage of growing trends toward organic food and health food in general. Despite its strong position and fast growth, WhiteWave is cheap compared with competitors. As for its parent, Dean's future is less certain, but it is in good hands and is taking steps to generate value. Shareholders of both companies are likely to be rewarded over time.
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The article Ride This IPO's Wave to Profit originally appeared on Fool.com.
Jacob Roche owns shares of Dean Foods. The Motley Fool owns shares of Dean Foods and Whole Foods Market. Motley Fool newsletter services recommend Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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