Taking a Taste of WhiteWave Foods


I've started out the new year resolved to identify and buy some fresh stocks for the socially responsible Prosocial Portfolio I'm managing for Fool.com. After all, my last two stock purchases were simply just adding to existing positions in Hain Celestial and Whole Foods Market .

My first 2013 stock purchase for the portfolio, WhiteWave Foods , rides the same trends that the above companies do.

The business
Dallas-based WhiteWave Foods is no new upstart, even though it is a recent IPO. It's being spun off debt-heavy dairy company Dean Foods, which has been busy trying to find ways to pay off its mountain of obligations.

To my way of thinking, WhiteWave's business comprises the most tantalizing parts of its former parent: WhiteWave includes the Silk and Horizon Organic brands, giving WhiteWave a solid position in plant-based foods and beverages and organic dairy products.

The company's product portfolio also includes International Delight and Land O'Lakes creamers and beverages. In Europe, WhiteWave provides the Alpro and Provamel brands.

The Silk and Horizon Organic brands are key to the business. Silk provides soy, almond, and coconut milk, which are increasingly relevant and healthy substitutes for conventional dairy. WhiteWave contends that it's a pioneer in its categories, and that these brands enjoy No. 1 or No. 2 brand positions based on U.S. retail sales. Its Alpro brand, which consists of soy-, almond-, hazelnut-, rice-, and oat-based food and beverages, enjoys No. 1 brand positioning in Europe.

WhiteWave's purported mission gels perfectly with the Prosocial Portfolio. According to its IPO prospectus: "Our mission is to create a food and beverage company that combines the entrepreneurship, spirit, principles, and practices of small food companies with the professionalism, resources, and scale of large food companies. We aspire to change the way the world eats for the better by providing consumers with innovative, great-tasting food and beverage choices that meet their increasing desires for nutritious, flavorful, convenient, and responsibly produced products ."

Why I'm buying
WhiteWave's IPO filing revealed some compelling reasons to consider its stock. By extension, the trends it revealed bolster the thesis to buy and hold stocks like Whole Foods Market and Hain Celestial. The market for the kinds of products these companies are focused on is growing as more and more consumers seek healthier eating habits. The market's also not tapped.

According to WhiteWave, the total market for plant-based foods and beverages was $1.9 billion in the U.S. in 2011, and generated a compound annual growth rate of 8% from 2009 to 2011.

More specifically to WhiteWave, sales of almond-based drinks alone have been growing like gangbusters. This subcategory achieved 170% CAGR from 2009 to 2011, and represented a $289 million market in 2011.

WhiteWave's prospectus draws a conclusion that many of us are coming to: Consumers are increasingly attracted to plant-based products like these for nutritional reasons as well as for lighter environmental impacts than traditional dairy products impart.

WhiteWave's Horizon Organic brand also sits in a sweet spot in the marketplace. Premium dairy products together made up a $2.3 billion market category in the U.S. in 2011, and generated 8% CAGR from 2009 to 2011. The organic milk subsector represented $1.2 billion in U.S. revenue in 2011, with an 11% CAGR from 2009 to 2011.

Remember, this growth was achieved despite the fact that the U.S. economy hasn't been on the most solid footing, which gives us a pretty impressive sign that American consumers are genuinely increasing their interest in healthy, environmentally gentler foods.

This market data bodes well for WhiteWave and companies like it. This is a growing category, and a market that WhiteWave points out is underpenetrated; organic milk made up just 7.5% of 2011 milk sales in the U.S., for example.

Before you shrug off soy milk and its ilk, remember that WhiteWave may sound like a niche player, but it isn't one. You've likely seen its products on conventional grocers' shelves, and retail behemoth Wal-Mart is actually its largest customer. If you want exposure to more conventional products, don't forget WhiteWave's International Delight and Land O'Lakes creamer businesses.

There are good reasons that the IPO could be good for WhiteWave's business and also from a shareholder's standpoint. As it's now a stand-alone company, separate from Dean Foods, management will be able to focus better on these specific business lines, and no longer vie with Dean Foods' other businesses for capital allocation.

Another reason to buy now is that WhiteWave shares haven't exactly gone IPO-crazy since they hit the scene, having skidded downward from their post-IPO high of $19.17. This is a marked difference from another recent organic player IPO, Annie's , which skyrocketed after going public; even though its shares have retreated, that stock still trades at 34 times forward earnings.

WhiteWave's currently trading at 22 times forward earnings. It's not exactly bargain-bin pricing, especially given the fact that analysts expect just 18.3% growth next year, but given the potential for a great deal of growth in its product categories and its differentiated mission, I find WhiteWave's current price a reasonable one to pay.

And now, the risks
Dean Foods is a bit of a fly in the soy ointment at the moment. Right now, it retains a controlling stake in WhiteWave, so that's not thrilling when it comes to a level of shareholder-friendliness I prefer: having a vote that actually matters. That won't happen until Dean Foods spins off the remainder of the company.

WhiteWave has also taken on debt to make a big payment to Dean Foods, in effect helping Dean clean up its balance sheet disaster. WhiteWave incurred $885 million in new indebtedness and directed some of the proceeds of the IPO for payment to Dean.

As I stated before, WhiteWave's biggest customer is Wal-Mart, which represented 17% of its total sales in 2011, and even inched up to 18.3% of total sales in the first six months of 2012. The company's top five customers made up 41% of WhiteWave's sales in the first half of last year, as well. The loss of any of its biggest customers could prove a serious drag on WhiteWave's results, and as for Wal-Mart, it's a pretty tough retailer for suppliers to rely on, given its drive for super-low prices.

Last but not least, there's stiff competition in the space as even conventional food concerns try to jump on the healthy-food train to capture consumers' more discerning dollars.

Foolish bottom line
There are big trends afoot in consumption these days; these health- and environment-conscious trends are not just about organic but about plant-centric menus, too. There's a reason that Whole Foods is launching the Engine 2 Plant-Strong products this month. There's a reason that Hain Celestial recently bought New York City's raw juice company BluePrint. They're the same reasons items like Silk's plant-based beverages are enjoying a growth spurt.

WhiteWave includes some risks and negative attributes, such as Dean Foods' continued controlling interest, but my belief in positive growth offsets the negatives. I'm excited to pour some WhiteWave into the Prosocial Portfolio and continue watching the growing trends.

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The article Taking a Taste of WhiteWave Foods originally appeared on Fool.com.

Alyce Lomax owns shares of Whole Foods Market. The Motley Fool recommends Hain Celestial and Whole Foods Market. The Motley Fool owns shares of Dean Foods Company, Hain Celestial, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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