Riding WhiteWave to Healthy Profits
The company is gaining market share in a growing category.
The company’s largest growth opportunities are in plant-based beverages (PBB), which are drinks that include little to no animal products. It’s one of the fastest-growing segments in the food and beverage industry with sales increasing some 15% year-over-year over the past two years, and it now represents a $3 billion per year category.
WhiteWave is the market share leader with about 25% of the total market; its brands include Silk, which has nearly 60% of the soy market, and Horizon Organic and International Delight which enjoy the No. 1 and No. 2 positions in their respective categories in the US. Overall, in 2012, organic and PBB beverages only accounted for 7.9% of the milk-related sales, up from 5.6% in 2011. The number is expected to grow to 12% by 2016.
A Fresh Play on an Existing Brand
Thanks to originally being owned by Dean Foods (NYSE:DF) (from which it was spun off last October), WhiteWave Foods has a wide and established distribution network, including Wal-Mart (NYSE:WMT), which accounts for 18% of total sales, and high-end stores such as Whole Foods (NASDAQ:WFM). But along with the benefits that come from being a spin-off -- launching with an embedded customer base and dominant shelf space -- the company also has to face a tailwind that has nothing to do with the product, namely the dynamics of stock price action that typically surrounds a spin-off in any company.
Most spin-offs come with a natural contingency of sellers -- that is, owners of the parent company that don’t want the smaller business as part of their portfolio. This is due to the fact that spin-offs are often the result of the subsidiary being too small, offering slow or no growth, or simply operating outside the parent company’s core competency. In WhiteWave’s case, none of these issues were true. As mentioned above, it is enjoying much faster growth; it is a category leader that seemed to fit nicely under the Dean Foods umbrella. And with a market cap of $3.3 billion -- nearly double Dean Food’s current $1.8 billion -- it certainly was not an inconsequential piece of the parent firm. The spin-off was done for near-term financial reasons rather than for a strategic long-term plan.
But that didn’t prevent the stock from suffering from the overhang; shares were doled over a 10-month period from October 2012 to July 2013, and the stock couldn’t make any headway. It basically traded from its opening day high of $19 per share down to a low of $15.80 in late June when the last of the divestiture was announced. Since that point -- after it announced a solid second quarter, analysts upgraded it, and investors became more comfortable with the story -- shares have climbed some 20% to today’s $20 per share level. The stock is a little pricey, carrying a 29x forward P/E, but given its growth prospects, not unreasonable.
Growth From Inside and Outside
Within the PBB sector there are numerous growth opportunities. The company has recently ramped up its almond and coconut milk products which, while only representing 25% and 2% of the PBB market, have grown 37% and 9% over the past two years.
Deals with other industries will also help expand product lines and improve its already healthy (pun intended) 8.9% operating margin and 5.1% profit margin. WhiteWave recently announced a partnership with Green Mountain Coffee Roasters (NASDAQ:GMCR) to market iced latte products using creamers made from WhiteWave PBB products. Coffee creamers themselves were an overall $3.9 billion business in the US in 2012. The category is growing 10% annually with the PBB sector comprising 15% of that, but growing at 25% per annum. Within the growing category WhiteWave is taking market share: its share rose from 14.7% to 18.1%, in the second quarter; by comparison, the company's share of the ready-to-drink coffee beverage market increased from 11.3% to over 16% within the same time frame.
The company gets around 84% of sales from North America and 16% from Europe, suggesting that there is ample room for overseas growth. While overall whole milk consumption is down in the developed world, consumption of PBB and skim milk products is still on the rise. Recently the company has been exploring the creation of a zero calorie or “diet” brand of milk that still offers nutritional benefits.
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