Leaner, Meaner Dean Foods Offers a Special Situation

Dairy pure-play Dean Foods (NYSE: DF  ) is flirting with its 52-week high after an encouraging earnings report released earlier this week. As it so often goes in special situations, investors deemed the company relatively uninteresting after a high profile spin-off of plant-based food segment WhiteWave (NYSE: WWAV  ) and divestiture of Morningstar -- purveyor of staples such as International Creamer. Skeptics cited declining milk consumption and heavy debt as detractors to the stock, but, post spin-off, Dean Foods is a cash-generating, inexpensive pick in an otherwise difficult sector. With the recent earnings report in mind, let's take a closer look.

Earnings
Before we dig into the financials, investors need to take note that, on May 17, the company will spin an additional 47.7 million class A shares and 67.9 million class B shares of WhiteWave to Dean Foods holders. This is an important step in the special situation we will touch on in a moment.

In anticipation of the stock price dipping down post-spin, the company is set to vote for a reverse stock split.

As a stand-alone company, Dean Foods brought in $0.16 per share -- just on top of management's earlier guidance of $0.10-$0.15. Income for the continuing business amounted to $74 million, compared to $66 million in the year-ago quarter. Volume, as expected, decreased just under 5%. Management attributes half of this loss to the leap year, which gave the company two fewer sales days.

On the debt front, which has been a longtime concern of investors and is the core reason for the spin-offs and divestitures, the company has paid off $2.6 billion in 12 months. The remaining debt is comfortable for the company, and in line with peers.

Though milk consumption is decreasing, and the company lost some market share in the quarter, its TruMoo brand is outperforming. Information Resources recently ranked 1,900 consumer goods brands, and awarded TruMoo fourth place. The flavored milk product contains less fat, no high fructose corn syrup, and 35% less sugar than competitors' products. It is the largest flavored milk brand.

On the whole, Dean Foods delivered a comfortable quarter -- ahead of analyst expectations and internal guidance. But there's more to this stock than milk sales.

The deal
As mentioned in a previous article, Dean Foods' spin-off and ongoing holdings of WhiteWave has tricked the market. Even after the share spin on May 17, Dean Foods will hold on to $550 million worth of WhiteWave for another year or so. But as it stands today, Dean Foods holds nearly $2.5 billion worth of WhiteWave. If you subtract that out of the current DF market cap, that gives the operating business a value of a little more than $1 billion. Management has guided 2013 earnings between $0.45-$0.55 (note that earnings have come in above guidance for nine quarters straight now), implying that, at mid-range, the ongoing Dean Foods business is trading at roughly 12 times earnings. At the top end of guidance, the metric gets closer to 10 times earnings.

For reference, ConAgra trades at 14 times earnings, and Kraft Foods trades at nearly 18 times earnings. WhiteWave trades at 22 times forward earnings.

To top things off, the company is continuing to cut costs, and its severely lessened debt load will bring interest expense much lower compared to the year-ago numbers.

In all, Dean Foods is a very well-managed company that is operating as a leaner machine with strong cash-generating potential, and trading at a discount to peers.

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  • Report this Comment On May 12, 2013, at 12:28 AM, TelsaRowe wrote:

    Dean's Foods is a disastrously managed company esp under Gregg Engles leadership (now heading WWAV...coincidence?). After nearly bankrupting the company with a ridiculous dividend years ago which added mountains of debt, the company found its way into an anti-trust lawsuit (among other pending litigations) and was so desperate they had to (fraudulently) spin off Whitwave. Dairy is a dying business with zero room for error. The favt that you mention Kraft's p/e and compare it to DF's shows how clueless you are. I also love how you try to act like a reverse split is somehow good for shareholders.???? You are a complete idiot sir and the only play to be had here is shorting DF to the ground. I speculate the company will be bankrupt by 2016. Guess who will probably be there to gobble them up then? WWAV with Gregg "fraud" Engles back on top of it all again. Fool.

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