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How Investors Can Benefit From Declining Milk Volumes in the U.S.

The dairy industry in the U.S. is trying to solve an difficult puzzle: how to revive milk sales. According to a report by Packaged Facts, the dairy alternative beverages or plant-based beverages market in the U.S. is growing rapidly . In addition, per capita fluid milk consumption has fallen to about 0.61 cup-equivalents per day from an earlier level of 0.96 cup-equivalents per day, according to a new report from the USDA's economic research service .

In response to this shift in consumer preferences, Dean Foods (NYSE: DF  ) was quick to spin off its fast-growing WhiteWave division, which makes Horizon Organic Milk and Silk soy products, into WhiteWave Foods (NYSE: WWAV  ) . WhiteWave Foods competes with the likes of Hain Celestial (NASDAQ: HAIN  ) and Blue Diamond Growers in the plant-based beverages market, but is it a good buy?

WhiteWave is on a roll
WhiteWave is known for its popular Silk brand of plant-based milk (soy, coconut, and almond milks), International Delight and Land O'Lakes creamers and iced coffees, and the Horizon brand of organic milk. WhiteWave is having a terrific run after going public in October of 2012, which has led to more than seven positive estimate revisions after the release of its third-quarter results. In its third quarter, the company reported 10% revenue growth and earnings-per-share growth of 21% from the year-ago quarter.   The company ended the third quarter with $87.1 million in cash and equivalents.

WhiteWave continues to maintain the No. 1 position in all of its sub-categories with a 75% share in soy, a 65% share in coconut, and a 53% share in almond. In order to consolidate its position and propel growth to the next level, WhiteWave announced the acquisition of Earthbound Farms. Earthbound is the largest organic produce brand in North America and a leader in organic packaged salads, with anticipated sales of $500 million in fiscal 2013. The deal is expected to contribute $0.07 per share to adjusted earnings in the first fiscal year after the deal is closed.

Another good option
Hain Celestial is also having a stellar run, like WhiteWave, as a result of consumers switching to organic and natural food thanks to growing health awareness. On the back of strong demand for its assortment of organic products, Hain has posted 14 straight quarters of double-digit earnings growth . In the first quarter of fiscal 2014, Hain's revenue jumped 32.7% year-over-year to $477.5 million and adjusted earnings per share moved up 26.8% .

Hain's WestSoy brand proudly sits at the No. 1 spot in non-dairy soy beverages . Rice Dream and Soy Dream are the other milk substitutes in Hain's portfolio. The company plans to roll out numerous coconut milks, nut milk blends, almond milks, and rice milks under the Dream brand. In order to expand its offerings and also gain a stronger foothold in the international market, Hain announced the acquisition of U.K.-based Basmati rice business Tilda .

Going forward, Hain expects sales growth of 17% and earnings in the range of $2.95-$3.05 per share, which would represent a 16%-20% year-over-year gain.

Dean tries to get back to normal
Dean Foods has been struggling in the wake of declining fluid milk consumption. To make matters worse, it lost a contract from Wal-Mart last year. As a result of this, the company has completed seven of its eight announced plant closures. The plant closures are part of Dean Foods' cost-cutting initiative, with targets of $120 million in fiscal 2013 and $80 million-$100 million in the next fiscal year.

These plant closures will improve the efficiency of the remaining network and drive increased competitiveness going forward. As a consequence, Dean Foods has already added significant business wins in fiscal 2013, positively impacting fourth quarter volumes. However, looking at the current industry volume trends, Dean Foods expects volumes to decline.

One of the factors dragging Dean Foods down currently is the cost of raw milk, which is used as a feed-stock. The price of raw milk has been increasing on the back of strong demand for milk powder, especially in China. Management has cautioned that prices are expected to remain high until the second half of 2014.

As of now, Dean Foods is trying to cope with the loss of a contract from Wal-Mart and implementing a turnaround. It is also betting on products such as TruMoo low-sugar chocolate milk to fuel revenue growth going forward. Until Dean Foods shows signs of recovery from the Wal-Mart contract loss, it's worth staying on the sidelines.

Bottom line
Dean Foods is trying to recover and it has found some success. However, it will still suffer because of a drop in milk volumes. In comparison, WhiteWave would be a better buy as the company has a wide range of products that include milk substitutes. The same can be said about Hain, which is a diversified player in organic food. Investors can easily find their way around declining milk volumes in the U.S. by investing in WhiteWave or Hain.

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9/2/2015 3:04 PM
DF $16.35 Up +0.27 +1.68%
Dean Foods Company CAPS Rating: ***
HAIN $58.57 Down -0.38 -0.64%
Hain Celestial CAPS Rating: *****
WMT $64.37 Up +0.55 +0.86%
Wal-Mart Stores CAPS Rating: ***
WWAV $45.18 Up +0.68 +1.53%
WhiteWave Foods CAPS Rating: ****