White Wave Foods, Inc. (WWAV) is an organic food and beverage company traded on the New York Stock Exchange with notable brand names under its control such as Horizon, Alpro, International Delight, Silk and Land O Lakes. Similarly to Hain Celestial (HAIN), White Wave is a manufacturer of organic consumer foods and beverages not to be confused with companies like Whole Foods (WFM), a chain of stores in which organic products are sold. WWAV is a relatively new company in the public forum having recently completed its spin off from former parent company Dean Foods (DF) in late May. Since the break-up shares of WWAV rallied and haven't looked back.
In the period dating back to June 1st, WWAV has outperformed DF by an enormous amount, with shares rising 24.55%. In addition to taking their assortment of healthy food and beverages options, White Wave also was able to hijack Chairman Gregg Engles from Dean. Engles had been on the Board of Directors of Dean Foods since 1994 and served as CEO for 7 years from 1994 to 2001. Engles taking over at White Wave has had a palpable impact on the company. For a firm to start operating as its complete own corporate entity with a veteran CEO who knows the industry gives it a huge advantage and can potentially help avoid making some of the elementary mistakes a new management team would be susceptible to.
Q3 2013 Performance
The earnings report for third quarter of 2013 for WWAV showed that it is the real deal. The year-over-year growth that White Wave saw across the board is reason alone to become bullish on the organic foods and beverages firm. WWAV saw y-o-y improvements in the following areas of business:
- 10% growth in consolidated sales
- 19% increase in consolidated operating income, despite higher production costs
- 21% rise in EPS
- Volume growth in every brand manufactured by WWAV
White Wave operates mainly in two distinct geographical areas: North America and Europe; both these regions showed continued growth and forecast improvements in the future. It's important to note that WWAV is not a story like Ford (F) where most of their business is performing very well but there is one or two aspects of the company's sales strategy that deduct from overall bottom line earnings (ex. Ford Europe).
Similar to their overall corporate structure, many of WWAV's brand names are still in their formative years. Given that these brands have not had a lengthy period of time to generate revenues like some of White Wave's other brands have been capable of, management remains very confident on the growth prospects of its newer brands, specifically Silk and Alpro. Mr. Engles expressed his confidence on White Wave's most recent Quarterly Conference Call, stating:
"We continue to believe that client based alternatives to dairy are in the early stages of their development and that the Silk and Alpro brands and the plant based category globally offer compelling opportunities for WhiteWave and its shareholders."
Silk brand sales reported an incredible sales growth figure of 60% in the third quarter. Alpro is sold exclusively in Europe and saw sales increase 19% in the quarter.
Coffee is another industry that White Wave has been able to tap in to successfully. Coffee creamers and beverages saw sales rise 9%, while refrigerated flavored creamer category's sales advanced 8%. In the iced coffee market, WWAV has been able to establish itself as the leader player in that space. International Delight is the major brand name for White Wave in this segment; sales of International Delight outperformed the category as a whole and posted "low double digit growth".
Consistent Growth
Since its IPO on 10/26/12, WWAV has posted positive EPS and shown solid revenue growth every quarter that it has reported earnings for. A quick glance at White Wave's income statement(s) over the last 5 quarters will show top-line numbers increasing or maintaining the same level for each of the past 5 quarters. White Wave's cash flow statements also show positive cash from operations each of the last 5 quarters with the exception of Q1 2013.
Market Share
A major driver for White Wave is the footprint they've been able to establish in several markets within its industry. Some of the figures that WWAV brags are frankly eye-opening. The Silk brand alone possesses approximately 50% of the overall plant based food and beverage category. In the subdivision of plant based food and beverages, White Wave is able to boast the following statistics:
- 75% share in the Soy market
- 65% share of the coconut market
- 53% share of the almond market (increased 49% last quarter)
In the organic milk category, WWAV has a market share of 43%, due to its vastly successful Horizon brand.
New Products and M & A
There were two aspects of WWAV's Q3 Conference Call that were relatively vague but very interesting for investors, both in the question and answer section regarding mergers and acquisitions and new products/releases.
With respect to M&A, when asked if White Wave was ready for M&A, Engles had the following three comments:
"I think that we've been effectively ready from an organizational standpoint for M&A since we became a public company."
This can be interpreted a few different ways such as the company has been "ready" for over a year now and nothing has happened. I view this remark in a different light, however. I see this as a testament to the meticulous search requirements WWAV has before initiating talks in the M&A field of discussion. This goes back to the aforementioned benefits of having an experienced CEO. While I'm confident substantial effort was given to the finalizing of the separation from Dean as well as expanding its footprint in regions it already operates, White Wave has been monitoring potential opportunities for M&A that would be accretive to the company's profits.
"we're looking in the M&A environment to acquire companies and brands in categories that have the same sorts of supporting secular trends behind them that our existing categories have."
This further reinforces the scrupulous nature of White Wave's M&A business. They have not and will not acquire or merge with another business entity if they don't believe that the new addition will result in at least equal future growth figures that the company already forecasts.
"we're ready. I think we're going to be relatively selective about the types of things that we buy. But I believe that at some point in time M&A will become a part of this story that will augment what we believe is very-very exceptional organic top-line growth."
This is the most important comment regarding M&A Engles makes, in my opinion. While this beats the dead horse that WWAV will be selective in M&A, it also conveys, with confidence, that M&A is a very realistic possibility, but whether it be in the short term or long term is unknown. When Mr. Engles says "I believe that at some point in time M&A will become a part of this story", I immediately become excited, as a shareholder, about what the company has in its pipeline, even it may be years down the line.
Turning our attention now to new products, Judy Hong, an analyst from Goldman Sachs (GS), asked specifically about expansion in the Horizon brand and company president Blaine McPeak made some comments that investors should bookmark in their minds:
"I do think that 2014 will be the year where you begin to see us migrate into new categories, new parts of the overall retail store environment. And those categories will be -- those categories that we believe have potential that have a strong linkage to function amongst a household that have younger kids."
He went on to essentially say that WWAV is ready to start expanding into other categories with its Horizon brand. He expects the first half of 2014 to be when consumers will see new products under the Horizon label. Mr. McPeak did place some emphasis on the fact that this process will be a "slow burn" as opposed to a "big bang" which may upset some investors but it is absolutely the safer plan of attack rather than launching a new line of products full throttle.
The vagueness of McPeak's statements regarding new releases has its drawbacks but also its promise. Although readers of the conference call are unsure and left to speculate about what kind of products White Wave will start to roll out, it also will have minimal effect on share price currently. This is where a huge opportunity presents itself.
Both of these topics weren't mentioned in the executives' prepared remarks and were briefly covered in the question and answer portion of the call. Many stakeholders will delegate these matters as unimportant, thinking "if the executives don't care enough to mention it in the call, why should I?" I feel that unimportant isn't the best word to utilize in this scenario, I prefer to use underemphasized.
These are two potential areas of business that can boost shareholder value in massive proportion. For an example of what M&A can do for share price, take a look at the respective charts for Jos. A. Bank (JOSB) and Men's Wearhouse (MW). On Tuesday morning, news emerged of Men's Wearhouse's offer to buy Jos. A. Bank, which ironically comes just a few weeks after Jos. A. Bank attempted to buy Men's Wearhouse. JOSB and MW finished the day with shares up 11.25% and 7.50% respectively. And that is just from news that an offer was made. Any major move White Wave makes in the future in the M&A arena presents huge opportunity for share price to accelerate quickly and could add as much as $2 (which at current levels is just under 10%) to shares overnight, then whatever additional upside acquired in the agreement in the future.
The effect an entire line of new products can have on a company is rather self-explanatory, as long as the new introductions are well received by customers.
School Lunch Initiatives
One area that White Wave could focus these new products on is school lunches. This article by the Huffington Post outlines several details about childhood obesity (over 17% of children are categorized as obese) and some of the initiatives that have been taken in recent years to alleviate this "national security issue". First Lady Michelle Obama was a largely influential driving force behind the Healthy Hunger-Free Kids Act of 2010 which set new nutritional standards in schools by enacting programs such as the "Farm to School Program". There is also the National School Lunch Program which has been urging schools to make lunch offerings for children more healthy while subsidizing costs for both parties.
Local governments have also been making strides in reaching their target goal of lowering childhood obesity. Specifically, California, Mississippi, New York City and Philadelphia have reported lower obesity statistics as a result of healthier school lunch programs.
Unfortunately for WWAV, many of the healthy alternatives schools provide for its students will be in the form of cooked meals, but it won't be long until parents who solicit places like Whole Foods to buy organic products pass on the value they put in nutrition to their children. Instead of a bag of bite-size M&Ms and a Capri Sun juice box to accompany their sandwich, students will be arriving with a carton of organic milk (a segment in which Horizon has a market share of 43%!) and some miscellaneous snack option that could be one of White Wave's new products. It's a hypothetical and admittedly a bit of a reach, but healthy school lunches is an emerging trend that is underserved, highlighting an opportunity for someone to take advantage of, why not White Wave?
Production Capacity Expansion
White Wave is in the midst of several projects to expand production capacity that management believes will gradually save the company money over the next year and a half. A large portion of its focus has been on the supply chain. The company started a new filing line in the third quarter and is scheduled to have two other lines begin production in Q42013. There will be some initial costs but down the line this development will only continue to expand WWAV's margins which are definitely one the less impressive aspects of the firm's current operations and could use improving.
Industry Growth
The organic food and beverage industry is one with booming interest and demand emerging across the world as consumers shift their focus to healthier lifestyles. Research firm Researchmoz is calling for the industry to grow at a CAGR of 14.3% through 2016. This shows a massive opportunity for White Wave given the popularity of its current products and the potential new products it has in its pipeline.
Assuming WWAV's sales are able to grow at the predicted industry level, its earnings over the next few years could look something like this:
| Sales (in Millions) | Operating Income (in Millions) | Net Income (in Millions) | EPS | |
| 2013 | 2560 | 174 | 140 | 0.72 |
| 2014 | 2926 | 199 | 160 | 0.82 |
| 2015 | 3344 | 227 | 183 | 0.94 |
| 2016 | 3822 | 260 | 209 | 1.07 |
These numbers were calculated holding margins steady at estimated FY13 levels and using a CAGR of 14.3%
If White Wave's earnings do pan out to be something like this, providing steady earnings for the next few years, the company will be in prime position to make acquisitions, expand production, return value to shareholders or some combination of those lucrative options. Given that the company has been steadily cash flow positive since becoming a public company and has a debt ratio of only 0.59, WWAV is well-positioned in a booming market and this will be reflected in share price over the next few years.
Valuation
Valuation is always a debated topic for companies, especially for White Wave because the organic food and beverage industry is a relatively new one. Therefore, there is a dearth of publicly traded companies that solely manufacture organic goods like Hain and White Wave. There are however, enough companies that are either manufacturers or grocery store chains (such as Whole Foods and the lesser known Sprouts Farmer's Market (SFM)) that operate within the industry to make a legitimate comparison.
| WWAV | WFM | SFM | HAIN | Median Values | |
| Trailing P/E | 37.17 | 38.82 | 114.41 | 31.57 | 38.00 |
| Forward P/E | 25.31 | 28.82 | 68.04 | 23.82 | 27.07 |
| PEG | 1.95 | 1.86 | 2.77 | 1.81 | 1.91 |
| Price/Book | 3.9 | 5.42 | 11.46 | 3.08 | 4.66 |
| Price/Sales | 1.47 | 1.63 | 2.41 | 2.13 | 1.88 |
| Market Capitalization (in Billions) | 3.69 | 21.25 | 5.58 | 3.96 | 4.77 |
The median was used as the "industry standard" as opposed to the mean because the data for Sprouts Farmers provides outliers in nearly every category.
Looking at the table a few inferences about the industry in general can be made before analyzing individual firms. First, this is clearly a "new" market for companies to enter as evident by their market capitalization. The average market cap for the S&P 500 is $27.96 billion whereas the median for the four companies above is only $4.77 billion. This shows tremendous chance for growth in the industry as a whole. As healthier alternatives continue to gain traction in the hearts and stomachs of consumers, the companies that manufacture and/or sell these alternatives will grow.
Second, the median values for trailing P/E and forward P/E of 38.00 and 27.07 respectively are relatively high for an industry given the average P/E of the S&P 500 is 20.60 and the average forward P/E is 15.00. This shows that investors are willing to "overpay" (dependent upon your interpretation of the word; some may argue it's not overpaying if you believe the investment will be lucrative in the long term) for shares of companies that operate in this space.
In terms of focusing solely on WWAV, it trades pretty much in-line with the industry. An overly bullish investor could point to its forward P/E and price/sales as they are both slightly lower than the industry but I don't believe these differences in valuation to be material. I could emphasize that White Wave has a significant advantage over Hain Celestial (the company to comes to closest in terms of being a direct competitor) in terms price/sales but upon further examination HAIN has WWAV beaten when it comes to every other relative valuation metric. White Wave is currently fairly valued by the market, but I would be remiss to not mention the old adage that "a rising tide lifts all boats".
Analyst Sentiment
The feeling towards White Wave by the analysts covering it is positive and has been for the last few months as shown by the table below from the Wall Street Journal:
(click to enlarge)
The chart is pretty self-explanatory as the majority of analysts hold a positive outlook on the stock. I wouldn't recommend using price targets as a method of analysis for White Wave, at least for the time being. The mean price target among analysts is $20.17 per share which is below current market price. The only reason this is inaccurate is not because it doesn't support a bullish WWAV investment thesis, but rather that the most recent update in price target was back on 11/8/13 and the last day before the 8th that saw a change in a price target for WWAV was September 30th. In many cases this would be insignificant but shares of White Wave surged over 11% in the week following its impressive Q3 report, remaining near those levels and surpassing price targets that estimated upside in shares in the process.
(click to enlarge)
It will be interesting to see if any/how many research firms assert a new price target in the near future and where those targets fall.
Q4 2013 Outlook
Management forecasts that the upcoming quarter for White Wave will be another successful one. Top-line sales are expected to grow in the high single digits while operating income is expected to grow in the mid to high-teens and the full year margins are estimated to expand by 50 basis points over 2012 levels. EPS for the quarter is projected to be between $0.19 and $0.20 per share resulting in a fiscal year outlook of $0.71 to $0.72, which would equal year-over-year earnings per share growth of 18% to 20%.
Conclusion
White Wave is an excellent company that has been flying under the radar since its separation from Dean Foods, its average daily trading volume is only 1.18 million shares according to Google Finance. Its fundamental figures by themselves are sufficient for an investor to get behind, but when the industry outlook as well as other potential catalysts are introduced, WWAV becomes a must buy. To play with an open hand, in addition to all of the reasons listed above, the variable that pushes my bullishness over the edge is my faith in Mr. Gregg Engles and the rest of his management team. I believe that they have done and will continue to do an excellent job. I would wait for a pullback in the stock from current levels given the run it has been on in the last few weeks, but once an appealing entry point arises I would strongly recommend riding this organic food and beverage company all the way up.
Disclosure: I am long WWAV, HAIN, WFM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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