While the broader milk industry sours, Whitewave Foods (NYSE: WWAV ) continues to bring growth to investors looking for ways to jump onboard the health food bandwagon. In the most recent quarter, net sales increased by a whopping 36% and adjusted net income increased by 40%. Management noted that all of the company's brands experienced strong growth, led mainly by the Silk brand's almond milk, which increased sales by 52%.
As a result of the company's continuing performance, shares are up over 30% this year, and almost 15% just since the earnings report. As a shareholder myself, it's always important to look a growth stock in the mouth and make sure it isn't getting ahead of itself.
Several irons in the fire
While it's true that all of the company's brands experienced growth, I wouldn't necessarily characterize it as strongly as CEO Gregg Engles did.
For example, the North America Plant-based Foods and Beverages platform delivered 13% growth for the quarter, but that was primarily due to the aforementioned 52% growth in Silk's almond milk. While management didn't mention how other products in the platform performed, the growth was presumably not very impressive if the average is so much lower than the almond milk's performance. What management did mention was that the overall category grew by 20% during the quarter. Silk is the number one brand in all of its subcategories, so its low growth compared to the overall category suggests it may already be maturing.
The premium dairy segment grew by 8%, but Whitewave is in the early stages of expanding the Horizon Organic brand out of the dairy case with new products, such as Horizon Organic-branded macaroni and cheese. This will put Whitewave into more direct competition with another organic food manufacturer, Annie's (NYSE: BNNY ) , which gets a substantial part of its sales from boxed mac & cheese meals. Annie's mac & cheese already commands 7% of the U.S. mac & cheese market, up from 5% in 2010, so Whitewave will have some tough competition as it introduces its own products.
Whitewave is also introducing a number of other products, including a line of branded creamers in partnership with fellow growth stock Dunkin Brands Group. While it's often profitable to attach yourself to another growing brand, I worry that associating with Dunkin' Donuts might dilute the company's image as a healthy food company.
Most exciting, though, is Whitewave's joint venture with the China Mengniu Dairy Company. Part of the reason raw milk prices are at a record high in the United States right now is heavy demand from China. Wary of its own milk after a melamine poisoning scandal a few years ago, the country has been importing milk in large amounts from the US. If Whitewave can export not just its milk but also its reputation for quality, it could be a huge opportunity for the company.
Not quite a bargain
All in all, Whitewave had a good quarter, and investors can expect interesting news ahead as the company's various growth initiatives take hold. Unfortunately, a lot of that good news is already priced in. The company currently has an enterprise value to EBITDA ratio of about 25, not wildly overvalued, but nowhere near cheap either. And as my fellow Fool Michael Lewis points out, free cash flow growth is likely to be hobbled by increasing capital expenditures to increase capacity.
I agree with Michael on his conclusion as well. Whitewave the business is doing great, and Whitewave the stock is too, making it hard for new investors to get in at a good price. As long as the business keeps performing, it's likely the stock will too, but I'd be happier recommending it if it were cheaper.
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