Shares of Dean Foods (DF) hit a 52-week high yesterday. Let's look at how it got here and see whether clear skies are ahead.
How it got here
Fueled by a recent spinoff, shares of the dairy maker climbed to an intraday high yesterday above $19, essentially doubling over the past year as the chart below shows:
The company's decision to split off its WhiteWave division in a $300 million IPO, representing a 20% stake in the company, sparked the latest rally. Dean will continue to hold the majority of shares in WhiteWave, the parent of well-known brands like Horizon Organic Dairy and Silk soy milk, taking advantage of the market's hunger for a piece of the organic food market. For instance, shares of Annie's, known for its organic mac and cheese, have more than doubled since it IPO'd for $19 earlier this year, and Whole Foods Market has long been a market overachiever.
Dean will use the proceeds from the sale to pay down debt, which stands above $3.5 billion. Shares have climbed 25% since the deal was finalized, and WhiteWave will begin trading under the ticker WWAV on the New York Stock Exchange on Friday. When the IPO was initially proposed back in August, shares jumped 41%, after the stock had fallen sharply earlier in the summer as the drought raised concerns about higher dairy prices. Before that, a string of solid earnings beats had helped pump the stock up from the $9 level it had been trading at a year ago.
What's next?
Investors may want to question the market response to the WhiteWave split, as that division represented Dean's fastest-growing segment. In the latest quarter, WhiteWave contributed 37% of operating income on 31% growth to $58 million. Sales of WhiteWave increased 11%, but made up only 18% of companywide revenue, indicating it has also been much more profitable than Dean's aggregate operations. While the market cheered the $300 million cash infusion Dean will get from the IPO, that sum hardly puts in a dent in its huge debt burden. By shedding that growing segment, Dean could be paying a high price for a short-lived windfall.
The dairy seller has also announced it's looking to sell off its Morningstar division, which contributed $32 million in operating income last quarter, if it can find a deal that will "maximize shareholder value." With the potential loss of Morningstar on top of WhiteWave, only Fresh Dairy Direct remains as a growth engine. Notably, sales at Dean declined in the most recent quarter due to commodity prices coming down.
After hitting the recent 52-week high, the stock now trades at an adjusted P/E of 21, a steep price for a mature company with no apparent competitive advantage. Growth is likely to slow with the departure of WhiteWave, so it seems like this bull run may be coming to a close. Shareholders may want to consider investing in the spinoff as a way to play the growing organic dairy market.
