Gregg Engles, the former CEO of Dean Foods Company (NYSE:DF), bought 10,000 shares of the company’s stock on December 6th at an average price of $17.25 per share. Engles had left Dean to become the CEO of spinout The WhiteWave Foods Co (NYSE:WWAV), which operates many of Dean’s premium products including organic and dairy substitute products, but still sits on Dean’s Board of Directors. In percentage terms, this wasn’t much of a buy for Engles- he had owned 2.8 million shares before the buy- but it’s still an insider purchase and studies show that on average stocks bought by insiders outperform the market. We think that this is because insiders should prefer to diversify their investments unless they have a particularly good feeling about the business (read more about studies on insider trading). Engles also hadn’t bought shares in a while- our insider trading database shows that his last purchase had come in November 2009 at prices around $16 per share. The stock hasn’t performed that well since that time- it fell in price shortly after, and remained low before rising 61% in the last year- but it’s interesting to see him increasing his holdings.
With the departure of WhiteWave, Dean Foods Company saw a decline in revenue in the third quarter of 2012 compared to the same period last year. Gross profits were up 5%, however, and operating income rose as well even after controlling for a large goodwill impairment in Q3 2011. Considering that we’d expect that many of the products now in WhiteWave hands are likely to be higher margin, it’s impressive that Dean managed to increase its gross profits. The stock currently trades at 13 times consensus earnings for 2013; it earned 20 cents per share last quarter, which annualizes to a P/E of more than 20.
Renaissance Technologies, which was founded by billionaire Jim Simons, sold some of its shares in Dean Foods Company during the third quarter but still owned 2.6 million shares at the end of September- almost as many as Engles (see Renaissance Technologies’ favorite stocks). Billionaire David Tepper’s Appaloosa Management also cut its stake but reported a position of 2.2 million shares in its 13F (check out Tepper’s latest stock picks). Adage Capital Management- a large hedge fund managed by two former employees of Harvard Management, more than doubled the number of shares in its portfolio during the quarter to a total of 5.4 million shares, making it the largest holder of the stock in our database of 13F filings (find more stocks Adage was buying).
WhiteWave is possibly the closest peer for Dean Foods; the stock is trading at a forward P/E of 23, though some premium is to be expected as its organic/healthy foods should see higher growth going forward. We can also compare Dean to diversified food companies, including H.J. Heinz Company (NYSE:HNZ), The J.M. Smucker Company (NYSE:SJM), and Lancaster Colony Corp. (NASDAQ:LANC). These stocks’ forward P/E multiples all fall between the range set by Dean and WhiteWave; in fact, they all trade between 15 and 19 times forward earnings estimates. The range is even narrower when we look at these three peers’ trailing P/Es, which cluster between 19 and 20. Heinz and Smucker reported strong earnings growth in their most recent quarter compared to the same period in the previous year, and also made our list of the most popular packaged food stocks among hedge funds for the third quarter of the year. While Dean looks cheaper in terms of its expected earnings for next year, it seems that the company has to improve its operations quite a bit in order to meet those targets and these two larger diversified food companies might be better buys.
