In October 2012, Dean Foods Company (NYSE: DF) spun off the organic milk products manufacturer The WhiteWave Foods Co (NYSE: WWAV). Since then, Dean Foods’ share price has increased from $9.50 per share to more than $18.80 per share, while WhiteWave has been fluctuating in the range of $14.60 – $16.75 per share. Should investors be bullish on either WhiteWave or Dean Foods at their current trading prices?
Dean Foods is considered the leading supplier of branded plant-based food and beverages such as almond, coconut milk, and soy. Previously, it had three reportable business segments, including Fresh Dairy Direct, WhiteWave-Alpro, and Morningstar. The majority of Dean Foods’ revenue, $9.6 billion, or 74% of the total sales, was generated from Fresh Dairy Direct in 2011. At the beginning of Jan 2013, the company announced that it completed the sale of Morningstar Foods division to Saputo for around $1.45 billion. Morningstar Foods is considered the leading provider of extended shelf life creams, beverages, and dairy products. In 2011, Morningstar generated $1.3 billion in revenue and $95.4 million in operating income, or 7% of the total sales. From the sale, Dean Foods expected to receive around $887 million in net proceeds.
As mentioned above, Dean Foods also spun off its WhiteWave Foods, which is the manufacturer of branded plant-based foods & beverages, coffee creamers, premium dairy products, under several brands including International Delight, Silk, Horizon Organic, Alpro and LAND O LAKES. In the last 3 years, WhiteWave has experienced a good growth in both the top line and the bottom line. The revenue increased from $1.45 billion in 2009 to $1.92 billion in 2011, while the operating income grew from $60.5 million to $114.3 million in the same period.
Much Lower Debt but Low Margin Business
After selling Morningstar and spinning off WhiteWave, Dean Foods is left with the low-margin Fresh Dairy Direct segment. While the operating margins of Morningstar and WhiteWave were 7% and 9.5%, respectively, the operating margin of Fresh Dairy Direct was only 3.6%. Dean Foods’ total debt would be reduced from $3.2 billion to only around $1.2 billion. In 2011, the Fresh Dairy Direct segment generated around $510 million in EBITDA. At the current price of $18.80 per share, the total market cap is $3.5 billion. After adjusting the cash and debt, the total enterprise value would be nearly $4.63 billion. Thus, the market is valuing Dean Foods at around 9.1x EV/EBITDA.