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Declining Fluid Milk Consumption Is Bad News for This Company

June 04, 2014 | About:
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The dairy industry in the U.S. is on a drive to revive milk sales. The dairy alternative beverages or plant-based beverages market in the U.S. is growing rapidly according to a report by Packaged Facts. In addition, according to a new report from USDA’s economic research service, the per capita fluid milk consumption has fallen to about 0.61 cup-equivalents per day from an earlier level of 0.96 cup-equivalents per day.

Looking at this shift in consumer preferences, Dean Foods (DF) spun off its fast-growing WhiteWave division, which makes Horizon Organic Milk and Silk soy products, into WhiteWave Foods (WWAV). WhiteWave Foods has competition with Hain Celestial (HAIN) and Blue Diamond Growers in the plant-based beverages market, but let's check if it is a good buy.

WhiteWave on a Roll

WhiteWave is popular for its popular Silk brand of plant-based milk, which includes soy, coconut and almond milks, International Delight and Land O'Lakes creamers and iced coffees, and the Horizon brand of organic milk.

After going public in October 2012, WhiteWave is overwhelmed with more than seven positive estimates revision after its results. The company reported 10% revenue growth and earnings per share growth of 21% in its recent quarter versus the year-ago quarter. The company exited the quarter with $87.1 million in cash and equivalents.

WhiteWave is at the top slot in all its sub-categories with a 75% share in soy, 65% share in coconut and 53% share in almond. WhiteWave announced the acquisition of Earthbound Farms in order to consolidate its position and propel growth to the next level. With anticipated sales of $500 million in fiscal 2013, Earthbound remains the largest organic produce brand in North America and a leader in organic packaged salads. The closure of the deal is expected to contribute $0.07 per share to adjusted earnings in the first fiscal year.

Hain Celestial: Another Good Option

Hain Celestial is also suffering just like WhiteWave, as a result of consumers switching to organic- and natural-food due to growing health awareness. Hain has posted 14 straight quarters of double-digit earnings growth on the back of strong demand for its assortment of organic products. Hain’s revenue increased 32.7% year over year to $477.5 million, and adjusted earnings per share jumped up 26.8% In the first quarter of fiscal 2014.

Hain’s WestSoy brand is at the top slot in non-dairy soy beverages. Other milk substitutes in Hain’s portfolio are Rice Dream and Soy Dream. The company has plans to roll out several coconut milks, nut milk blends, almond milks and rice milks under the Dream brand. Hain announced the acquisition of UK-based Basmati rice business Tilda in order to expand its offerings and also get a stronger foothold in the international market.

Moving ahead, Hain expects sales to grow by 17% and earnings to be in the range of $2.95 to $3.05 per share, representing a 16% to 20% year-over-year gain.

Dean Trying to Get Back to Normal

The declining fluid milk consumption is creating problems for Dean Foods. Other bad news for it is losing a contract from Wal-Mart last year. This resulted in the closure of seven of the eight plants. This can be considered a part of the $120 million cost-cutting initiative during fiscal 2013 and $80 million to $100 million in the next fiscal year.

Going forward, these closures will improve the efficiency of the remaining network and drive increased competitiveness. This allowed Dean Foods to already add significant business wins in fiscal 2013, pushing upwards its fourth quarter volumes. However, Dean Foods expects the volumes to decline looking at the current industry volume trends.

The cost of raw milk, which is used as a feedstock, is one of the factors dragging Dean Foods down. The strong demand for milk powder, especially in China, is driving the increase in the price of raw milk. The prices are expected to remain high until the second half of 2014 as reported by the management.

Dean Foods is trying to come out with loss of a contract from Wal-Mart and is expecting to turn around. Going forward, it is also positive on products such as TruMoo low-sugar chocolate milk to drive revenue growth. There are few signs of recovery from the after effect of Wal-Mart's contract loss.

Bottom Line

Dean Foods is on a spree to recover and is quite successful. However, a drop in milk volumes is still going to hurt the food major. On comparing the three brands, WhiteWave is a better buy as the company has a wide range of products that include milk substitutes. Similarly, Hain is a diversified player in organic food. Therefore, investors can easily come out of the declining milk volumes in the U.S. by investing in WhiteWave or Hain.


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