After a Sharp Decline, Is Dean Foods a Good Bet?

Investors weren't too pleased with Dean Foods' latest financial results, dropping the company's shares for a sharp loss in early February. Is it time for investors to pounce?

Feb 19, 2014 at 3:10PM

Dean Foods' (NYSE:DF) stock price has been heading the wrong way in 2014, with a notable drop in early February caused by a financial update that included an expected loss in the coming quarter.  The company continues to be plagued by declining fluid milk consumption in the U.S., a trend that was corroborated by the USDA in a May 2013 report.  Despite Dean Foods' near-term troubles, though, the company has vastly improved its financial fitness lately. It has implemented a business downsizing scheme that included selling and spinning off its Morningstar distribution and WhiteWave Foods (NYSE:WWAV) organic dairy units, respectively.  So, is Dean Foods a good bet at its depressed price?

What's the value?
Dean Foods is the largest domestic processor and distributor of fluid milk products. This is a low-margin commodity business that requires significant scale in order to generate profitability.  The company spent much of the past 20 years pursuing horizontal and vertical expansion. This included moves into related areas like ice cream and creamers as well as a push into the organic milk sector via acquisitions.  However, the rising weight of its debt load, in combination with investor impatience, led Dean Foods to abort its expansion strategy in 2012 and refocus on the traditional dairy business.

In fiscal year 2013, Dean Foods' results were less than optimal, as it reported declines in both revenue and adjusted operating profit.  The main culprit for the poor performance was a sharp rise in raw milk costs, a data point that management blamed on higher emerging-market demand for milk from farmers.  On the upside, Dean Foods' more efficient operations, relative to its pre-restructuring structure, allowed the company to remain profitable despite the challenging operating environment and further invest in growing product areas, like its TruMoo flavored milk brand.

Trying to find a tailwind
Dean Foods is undoubtedly cheap, with a valuation of roughly six times its adjusted EBITDA. However, it has the wind in its face as it tries to overcome declines in domestic fluid milk consumption. As such, investors will likely find better returns in the sector with a niche player, like WhiteWave Foods. Despite the growth struggles of the overall milk industry, the company has found volume growth by focusing on organic and plant-based product lines. This strategy has allowed WhiteWave to pick up industry market share due to the products' perceived health benefits vis-a-vis traditional milk products.

Unlike Dean Foods, WhiteWave Foods' performance was strong in fiscal year 2013, as evidenced by a 10.3% top-line gain that was aided by solid volume increases across its product portfolio, led by a scorching 58% increase for its almond milk offering.  More important, the company's focus on premium product categories has provided it with the flexibility to raise prices. This has led to an operating margin significantly above Dean Foods' razor-thin level. The net result was a strong level of operating cash flow that funded strategic initiatives like the company's recent acquisition of Earthbound Farms, the largest domestic seller of organic produce.

In addition, the strong financial results have allowed WhiteWave Foods to continue developing its creamer franchise, a key product area and the source of roughly one-third of its overall sales. In fiscal year 2013, the company enjoyed double-digit growth in its creamer segment. This was thanks in part to its ability to expand its flavored product portfolio, which includes partnerships with popular brands like Cinnabon and Cold Stone Creamery.

In the current fiscal year, WhiteWave Foods is looking for additional growth in the creamer segment. It recently announced an at-home creamer product partnership with coffee heavyweight Dunkin' Brands, owner of the Dunkin' Donuts franchise. The deal extends Dunkin' Brands' leading coffee franchise into the refrigerated section, allowing its millions of customers to enjoy Dunkin' Brands' coffee flavor in their own home brews. More important for WhiteWave, the deal brings a big brand name into its product portfolio, which will hopefully provide ancillary sales momentum for its full roster of products.

The bottom line
Dean Foods is lightly valued, which is a reflection of both near-term and long-term challenges in its traditional dairy business. While value investors might see a diamond in the rough with Dean Foods, they might be waiting awhile for a higher valuation, which would likely coincide with a return to positive overall milk consumption trends. As such, WhiteWave Foods seems to be a better bet, with a more diversified, niche focus in the milk business and a solid position as a supplier to the growing at-home coffee market.

3 good bets for long-term investors
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Robert Hanley owns shares of Dean Foods and WhiteWave Foods. The Motley Fool owns shares of 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers