Selling Dean Foods Is the Right Thing to Do

Per capita fluid milk consumption has fallen from 0.96 cup-equivalents per day to about 0.61 cup-equivalents per day, according to a new report from USDA's economic research service . "The majority of Americans born in the 1990's consume fluid milk less often than those born in the 1970's, who, in turn, consume it less often than those born in the 1950's," state the authors of 'Why Are Americans Consuming Less Fluid Milk? A Look at Generational Differences in Intake Frequency ."

This looks like bad news for a pure dairy milk play such as Dean Foods (NYSE: DF  ) . It bodes well for plant-based milk alternatives plays such as WhiteWave Foods (NYSE: WWAV  ) and Hain Celestial (NASDAQ: HAIN  ) , however. Demand for plant-based milk alternatives like soya milk, rice milk, and almond milk is increasing .

Dean's struggling
Dean Foods has been struggling, primarily due to the severance of a long-term contract with Wal-Mart earlier this year. As a result of the contract loss, Dean Foods had to shutter its plants to cut costs. The company is aiming to cut costs to the tune of $120 million in fiscal 2013 and $80- $100 million in the next fiscal year.

DF Chart

DF data by YCharts.

In its lackluster third-quarter report, Dean Foods reported a 2% decline in net adjusted sales to $2.2 billion. The decline was due to a loss of 150 basis points in the company's market share in U.S. fluid milk to 34.9%. In addition, industry volumes declined by about 1.7% in the third quarter. Analysts have forecast a 1.6% sales volume decline in the dairy processing industry as a whole for this year . Dean Foods expects its market share to stabilize and eventually increase in the coming quarters, however.

Dean Foods, which is banking on products such as TruMoo low-sugar chocolate milk to boost sales going forward, said that its net income moved up to $415.1 million or $4.35 per share. This included a $415.8 million gain from the spin-off of WhiteWave Foods. Excluding one-time items, third-quarter earnings were $0.12 per share; this was within the guided range.

Looking at the current industry volume trends, Dean Foods expects volumes to decline at a higher-than-expected rate. The company expects full-year 2013 earnings in the range of $0.85 to $0.91 per share, which is below analysts' expectations . For the fourth quarter, the company forecasts adjusted earnings in the range of $0.17 to $0.23 per share.

As of now, Dean Foods is a company in transition, trying to wriggle out of the tight corner into which it has been pushed as a result of the loss of the Wal-Mart contract. Until the turnaround materializes, it's worth watching from sidelines.

WhiteWave and Hain -- Better alternatives
As compared to Dean Foods, shares of both of the plant-based milk alternative plays -- Hain Celestial and WhiteWave Foods -- have performed much better.

WhiteWave Foods, the butter and milk producer, recently announced a deal to buy Earthbound Farms to expand its organic offerings . The company expects that this acquisition would add $0.07 per share to earnings. The deal is expected to close during the first quarter of 2014. As a result of this deal, WhiteWave shares shot up in a display of investor confidence.

WhiteWave's third-quarter results represented a 10% increase in sales to $639 million on the back of strong volume gains. WhiteWave generated earnings per share of $0.19 in the quarter, an increase of 21% from the prior year . North American sales of it plant-based foods and beverage unit, which includes Silk soy milk, almond milk, and coconut milk, increased 14% on the back of a 60% jump in almond milk sales. The volume growth indicates the rising acceptance of non-dairy milk products by consumers.

Hain Celestial, which also has an assortment of natural food products, has posted 14 straight quarters of double-digit earnings growth . Its WestSoy brand proudly claims to be the no. 1 brand in non-dairy soy beverages . In addition, Hain also produces and sells the Rice Dream and Soy Dream milk substitutes. Hain plans to roll out numerous coconut milks, nut milk blends, almond milks, and rice milks under the Dream brand.

Financially, Hain has been doing well as its products are in good demand. In the previous quarter, Hain's revenue increased 32.7% year over year to $477.5 million, and its adjusted earnings per share soared 26.8%. Considering the brisk growth rate of Hain's organic foods and non-dairy beverages, the company should perform well in the future.

Takeaway
Dean Foods is clearly struggling as the demand for milk declines. It might trade at a very low P/E ratio of 5.3, but the future is looking bleak right now and investors should stay away from it for the moment. On the other hand, both Hain and WhiteWave have been performing very well. WhiteWave is intent on growing its business aggressively and its products are in good demand. Similarly, Hain Celestial is also looking promising due to its diversified brand portfolio and presence in the organic foods space.

Investors should stay away from a pure-play dairy producer like Dean, focusing instead on new-age organic players like Hain and WhiteWave.

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