Summary
- WhiteWave Foods’ products, including its Silk-branded soy milk, its Horizon Organic milk, and its other well-known brands, have made a splash in the natural and organic foods industries.
- With its acquisitions of Earthbound Farms and So Delicious in fiscal year 2014, the company is even more prepared to take advantage of shifting consumer preferences.
- The company is well-positioned to capture growth within emerging markets from its Chinese joint venture.
- Significant overvaluation may be justified by strong fundamentals and strong growth prospects.
- A share price drop in the range of 10%-20% to account for this overvaluation may warrant opening a position.
Introduction
With the recent trends in consumer tastes, it's hard to ignore the telltale signs that consumers are leaning more and more toward including natural and organic foods in their diets. Every corner of society, from religion, to film, tocars (Tesla Motors, Inc. (NASDAQ: TSLA)), to pop culture, has felt the shockwave from these changing consumer tastes, and many major players, such as Whole Foods Market, Inc. (NASDAQ: WFM), Kroger Co. (NYSE: KR), United Natural Foods, Inc. (NASDAQ: UNFI), Costco Wholesale Corporation (NASDAQ: COST), and Wal-Mart Stores, Inc. (NYSE: WMT), are adapting to meet demand and have profited handsomely.
You don't need studies or statistics to tell you this. A single trip to your local grocery store, and your eyes will be met with an exploding number of brands catering to the health-conscious shopper. Recently, I took a trip to my local Giant and Safeway and saw the following:
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Source: Local Giant Grocery Store
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Source: Local Target
After investigating some of the above spotted brands, including Silk, So Delicious, International Delight, LAND O LAKES, Horizon Organic, and Earthbound Farm, I discovered that they all belonged to WhiteWave Foods Co. (NYSE: WWAV), a company recently spun off from Dean Foods Co. (NYSE: DF) in 2012. Operating principally in the natural and organic food industries, WhiteWave specializes in developing, manufacturing, and producing plant-based foods and beverages, including coffee creamers, dairy products, and organic produce. With its portfolio of well-known brands mentioned above, its focus on the natural and organics industries, its healthy European operations, and its penetration into the Chinese markets, I believe WhiteWave is well-positioned for future rapid, long-term growth.
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Source: Stockcharts.com
And investor sentiment agrees. Since its IPO in late 2012, WWAV has risen non-stop: The stock's 50-day moving average has never fallen below the 200-day moving average. Despite being an overvalued investment, with a P/E TTM ratio (62.5) that is nearly double that of the industry average (32.4 from Morningstar.com), strong fundamentals, which are discussed below, indicate that the expensive valuation is most likely justified. Given a base case scenario implied share price in the range of $60.00-$85.00, a price drop in the range of 10%-20% to account for the overvaluation may warrant initiating a position.
Fundamentals
Split into three different segments, WhiteWave's operating structure consists of its Americas Foods & Beverages, Americas Fresh Foods, and Europe Foods & Beverages. The company's full portfolio of brands include the ones mentioned above, Alpro and Provamel from its European operations, and Silk ZhiPuMoFang from its Chinese joint venture. For the past few years since its IPO, growth among all three segments was strong, with overall sales increasing 11.0% and 35.2% (removing the organic salads, fruits and vegetables segment, which was recently formed from the Earthbound Farm acquisition, yields a sales increase of 12.6%) year-on-year for fiscal years 2013 and 2014, respectively. The chart below details the year-on-year increase in sales growth for each of WhiteWave's product segments. As you can see, the plant-based foods and beverages segment tends to generate the highest increase in sales growth, due mainly to the popular Silk brand.
