Why I'm Giving Up On Dean Foods

Why I'm Giving Up On Dean Foods

Dean Foods and its sometime subsidiary, WhiteWave Foods , continue to drift further apart, and serve as an example of the performance gap between conventional and "healthy lifestyle" brands. Both companies reported earnings this week, and the difference in fortunes was stark. So stark, in fact, that I'm ready to end my outperform CAPS call on Dean.

One of Dean's greatest achievements this quarter was the continuation of its large cost-reduction initiatives, which sounds nice on paper, but is actually a signal of hard times -- Dean is reducing costs, in part, by shutting down as much as 15% of its manufacturing facilities, a move it would not be doing if business were booming.

In fact, Dean admitted that while industrywide sales volume was down 2.1% for the quarter, its sales volume was down 6%, mostly due to market share losses. In addition to losing its longtime contract with Meijer grocery stores last August, the company also lost a contract with Wal-Mart earlier this year to a cheaper rival.

The good news is that the company managed to significantly improve its debt-to-equity ratio by selling off its remaining interest in WhiteWave for $589 million. Selling off operations to pay down debt seems to be a theme with companies exposed to the conventional food business recently. Safeway announced in June that it would be selling its Canadian operations for $5.8 billion, and SUPERVALU sold a number of its major brands, including Albertsons, earlier this year. This move has helped pad the company coffers, despite continually declining cash from operations, and has helped boost both stocks considerably.

Of course, the downside is that selling off operations is a one-shot deal. Dean will no longer have WhiteWave's excellent sales growth making up for its poor core operations. In this recent quarter, WhiteWave reported 10% sales growth, driven by volume growth across all of its brands, and 28% net income growth. These numbers are comparable to Whole Foods, my favorite proxy for healthy food companies, which also had a bang-up quarter.

WhiteWave's stock, unfortunately, hasn't performed as impressively as the business since its IPO last year, but that may be due to high expectations right out of the gate -- on the day of the IPO, shares were selling for 27 times net income, cheap for a growth company, but perhaps not cheap enough.

The Foolish bottom line
While I'm not ready to say I was wrong about my underperform CAPS picks for Safeway or SUPERVALU, which have been a deep thorn in my CAPS score's side, I am ready to end my outperform call on Dean Foods. It's now sold off most of its most successful segments, and the milk industry is too volatile and presents too few growth opportunities for me to see much upside for Dean. As for WhiteWave, I still have faith that it will outperform in the coming years.

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The article Why I'm Giving Up On Dean Foods originally appeared on Fool.com.

Fool contributor Jacob Roche owns shares of Dean Foods and WhiteWave Foods. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Dean Foods, SUPERVALU, Whole Foods Market, and WhiteWave Foods. 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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