The day is finally drawing near when Dean Foods (DF) will spin off (most of) the rest of its WhiteWave Foods (WWAV) holdings. Today, Dean Foods will distribute 115.6 million shares of WhiteWave as a dividend to Dean shareholders. Dean will retain 34.4 million shares, or about 20% of shares outstanding, which it expects to dispose of within the next 18 months.
The completion of the spinoff won't change much for WhiteWave, but it will further distance Dean from its formerly fastest-growing segment, turning the company into more of a conventional milk pure-play -- not exactly a business at the top of every investor's wish list. Still, both companies recently reported earnings, and had what seem to be encouraging results.
WhiteWave grew sales by 9% while increasing volume across all of its brands. The biggest gainer was the company's Silk PureAlmond milk, which debuted in 2009 and is still showing incredible 55% sales growth. Silk is a powerful brand, with each of its products holding the top market position in their respective categories. Along similar lines, WhiteWave's organic milk and coffee creamer segments also outpaced their respective categories, keeping the whole brand portfolio ahead of the game. Management is expecting growth for the full year to clock in in the mid-teens.
The only thing is that, while WhiteWave does claim that each of its products grew faster than their respective categories, it is a little troubling to note that other healthy food companies have been outpacing WhiteWave. Whole Foods (WFM), my personal favorite proxy for the healthy food market, recently reported a 13% increase in sales, and Hain Celestial (HAIN -0.16%) had 21% growth in its recent quarter, bringing the company to record sales. By that comparison, WhiteWave's growth isn't very impressive.
Dean, on the other hand, is even less impressive. Adjusted operating income grew by a healthy 12%, but only by virtue of cutting sales, general, and administrative costs, pushing operating margins a bare 40 basis points higher. Sales actually declined by 3% during the quarter, largely due to declining sales volume in the milk industry in general.
As I noted a few months ago, milk consumption fell 30% from 1975 to 2005, and there's little reason to think it will start growing again. And unlike Cal-Maine Foods (CALM -1.44%), the No. 1 player in the zero-growth egg industry, Dean can't grow through acquisitions anymore. Despite its top position, Cal-Maine still only controls about less than a fifth of the highly fragmented egg market, while Dean controls 38% of the more consolidated milk market. Dean simply doesn't have competitors it can comfortably acquire anymore, especially with its large debt load.
The Foolish bottom line
Despite its weaker growth compared to similar companies, I continue to think WhiteWave will perform well, and the stock may get cheaper after the spinoff distribution, when larger institutional shareholders with certain size or index mandates may be likely to sell en masse. WhiteWave is riding a health food trend that seems likely to continue for many years.
My colleague Michael Lewis thinks Dean is also a bargain, but I have to respectfully disagree. At 12 times forward earnings, the stock may be cheap once you exclude WhiteWave, but I can't see where the growth is going to come from. What I see instead is a value trap.
