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Why I'm Switching From Milk to Silk

By Jim Mueller, CFA – Jan 22, 2014 at 7:35AM

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After watching for a year, I'm moving away from Dean Foods and further into WhiteWave Foods in my portfolio.

Have you ever received shares from a corporate spinoff and ended up actually liking the spun-off company better than the parent?

That's the situation I find myself in my Messed-Up Expectations portfolio – the real-money portfolio I run for The Motley Fool – with WhiteWave Foods (WWAV) and Dean Foods (DF). WhiteWave, which had provided a lot of the growth for its parent Dean Foods, first went public in October 2012. The MUE portfolio received its shares last May when Dean Foods distributed shares to current shareholders. 

At a grocer near you
You've probably seen WhiteWave's products without realizing they were all part of the same company. WhiteWave sells the 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.

Growth in sales of these products is quite strong, especially for Silk, which saw 14% year-over-year growth in the third quarter (the last one reported). This is faster than growth in the plant-based food-and-beverage category itself, meaning Silk is picking up some market share. Almond milk is really popular, occupying 59% of the category; Silk almond milk saw 60% year-over-year growth. 

The interesting part about this company is that CEO Gregg Engles left his position at Dean Foods in order to run WhiteWave Foods. While CEO at Dean Foods, Engles was the one who brought Silk, International Delight, and Horizon into the the company's fold. (He stepped down as Dean Foods CEO in late 2010, staying on as chairman of the board.) 

Engles is continuing to add organic and healthy food to WhiteWave's stable. The company recently acquired Earthbound Farms, which is the country's largest organic-produce brand. Healthy eating is a growing trend in this country, with growth at Whole Foods Market, Hain Celestial Group, and other healthy-eating-oriented companies.

Like child, unlike parent
In contrast, the situation at Dean Foods is worsening. Over the past three quarters, the company's share of U.S. fluid-milk sales has dropped by 8.2%, from a 38% share to a 34.9% share. At the same time, total industry fluid milk volumes have dropped every quarter this year, continuing a years-long trend. Plus, raw-milk prices have increased by an average of more than 11% for the past four quarters, with only one quarter seeing a sequential decline in prices. It also lost a major customer (Wal-Mart Stores, according to The Wall Street Journal) and executed a reverse stock split last year. 

All these signs indicate to me a company struggling to succeed. Its child WhiteWave is now a significant competitor and, I believe, the better company to be invested in at this point.

After a year, I've decided which of these two companies I wish to remain an owner of. Accordingly, I'll be selling my handful of shares of Dean Foods and buying more shares of WhiteWave shortly.

Come to the MUE portfolio's discussion board to talk about this or any of the holdings of the portfolio.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jim Mueller owns shares of Hain Celestial and Whole Foods Market. The Motley Fool recommends Hain Celestial and Whole Foods Market. The Motley Fool owns shares of Dean Foods, Hain Celestial, WhiteWave Foods, and Whole Foods Market. 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.

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