Dean Worth $20 to $23

I have been playing around with Dean Food’s (DF) valuation numbers in my head the last 3 days. My valuation range comes out to around $19.6/share to $23.04/share based on sum of parts valuation.

WhiteWave

WhiteWave (WWAV) is worth $2.5 billion or $13.50/share based on that fact that Dean holds 150 million Class B shares. Dean will use the $390 IPO million proceeds to pay down debt. That will be reflected in the lower interest expense in Fresh Dairy Direct Segment. Company has stated that it will distribute the shares “no earlier than 180 days following the closing of the IPO.” 

Morningstar

Morningstar is on the selling block. There was a Reuters report this past Thursday that there are multiple suitors for the company and the price tag is $1 billion to $1.5 billion. Let’s assume it gets sold for $1 billion in the worst case and $1.25 billion in the best case. In both cases, let’s assume Dean uses $500 million of the proceeds to pay off debt and the rest to distribute to shareholders. So, shareholders get $500 million or 2.70/share to $750 million or $4.05/share.

Fresh Dairy Direct

Fresh Dairy Direct Income

  • Operating Income will be over $400 million in 2012 even with higher commodity prices in 2012. They earned $226 million for the first half of 2012
  • Interest Expense. They will have $1.6 billion in debt. $1.13 billion of that will be senior notes and the rest of it will be the senior credit facility.
  • Corporate Expense includes things such as non cash share based expense. The company had $210 million corporate expense for the whole company in 2011. So, $150 million is a conservative estimate.
  • One time expenses includes such things as litigation expense, facility closing and reorganization costs that they seem to have every year.
  • Added $60 million to net income for FCF because they will have less capital expenditure compared to depreciation.

If Fresh Dairy Direct gets a multiple of 5 to 8 based time FCF, the value is $635 million to $1,016 million or $3.4 to $5.49.

Conclusion

 Adding all that up, I get a valuation range of $19.6 to $23.04. Obviously there are risks:

  • Whitewave share prices could go down. Right now the float is less than 25 million. Once the 150 million Class B Shares come into the market, there could be downward pressure on the price. Also, it is highly valued just like every other healthy food company. However, it does have the good growth.
  • Morningstar may not be sold or it may not distribute any of the proceeds if sold. However, there is considerable interest in the company based on the latest reports. The company has a history of increasing shareholder value. Besides the latest spin-off, the company in 2007 gave a $2 billion or $15/share dividend. Also, what else would they do with the proceeds? They will not pay off the senior credit facility fully. It does not make any financial sense. 
  • Fresh Dairy Direct is a low margin business and is dependent on commodity and fuel prices. However, the company is focused on cutting cost and lowering capital expenditures to increase FCF, and I have valued it conservatively. 
At the current price of $16.74 and my conservative valuation, Dean is severely undervalued. I would love to hear from everybody on this stock.

Disclosure: I am long Dean.

10 thoughts on “Dean Worth $20 to $23

  1. I like your analysis so far. What are your thoughts on LONG DF, and SHORT out the equivalent $$ amount of WWAV? You would be creating a stub for approximately $300-400M which would entitle you to the value of Morningstar proceeds + the value of Fresh Dairy Direct.

    • Yeah, that is one way to play it. If WWAV was a little higher >$17, I would be more inclined to do it.
      Although, there is never a 100% guarantee that management will distribute the WWAV shares.
      That is their intention after 180 days.

  2. I still think it might be a buy, but wanted to quibble about a few of your numbers.

    The latest debt for the whole company is $3.55B. The prospectus says WWAV is going have a payment of $1.15B, which appears to include the assumption of $870M of debt and a cash payment of $280M. Assuming all that is put down for debt reduction, total debt at DF would be around $2.4B.

    In addition, I think your operating income numbers are off. The $226M you quote does not include ANY corporate overhead. If you corporate overhead just basing it on percentage of revenues, you get something like $150M, so total for the year would be closer to $300M.

    Subtracting out $1B for morningstar and $2.2B for WWAV, you have an enterprise value still of ($3b market cap + $2.4B debt) – ($1B morningstar +2.2 WWAV) = $2.2B. That would be a EV/Op inc ratio of between 7 and 8. That is not expensive, but given the low return on the Direct Dairy assets and the amount of debt involved is not horrible. To make money, you would have to assume the EV/Op Inc is going to start moving towards 10.

    Maybe your numbers are better or I did the math wrong, but I do not think it is a screaming buy.
    Thanks.

    • > On the 3.55B debt

      Yes, you are right. I looked at the long-term debt without the current portion of $200 million. Also, I figured they would use the full proceeds
      of $390 million to pay off debt, but are using $100 million less. But they still have the $100 million on the balance sheet from the IPO which
      they will use to pay off debt at some point. So, you cannot totally discount that + cash flow generated from this quarter. If they don’t use the $100
      million extra proceeds + cash flow from this quarter, the debt will be as you say $2.4 billion. So maybe we settle in middle at $2.25 billion in debt

      > In addition, I think your operating income numbers are off. The $226M you quote does not include ANY corporate overhead. If you corporate overhead just basing it on percentage of revenues, you get something like $150M, so total for the year would be closer to $300M.

      So in my FCF calculation I had operating income of $400 million, but I did have Corporate Expense of $150 million based on the fact the whole company had $210 million in 2011. Let me know if I am missing something.

      > $2.2B for WWAV

      WhiteWave is worth $2.5+ billion as the price stands today. But, obviously the price could go down or up depending on the market.

      > Subtracting out $1B for morningstar and $2.2B for WWAV, you have an enterprise value still of ($3b market cap + $2.4B debt) – ($1B morningstar +2.2 WWAV) = $2.2B. That would be a EV/Op inc ratio of between 7 and 8. That is not expensive, but given the low return on the Direct Dairy assets and the amount of debt involved is not horrible. To make money, you would have to assume the EV/Op Inc is going to start moving towards 10.

      This is one way to calculate it and this is how some analysts are calculating it. But it would be ($3b market cap + $2.25 net debt) – ($1B morningstar + $2.5 WWAV) = $1.75B. So, about ~$500 million cheaper than your calculation. Fresh Dairy Direct EBIDTA should be around $500 million a year. If you assigning it a low multiple of 5 to EBIDTA, you are still talking of almost a $18 stock.
      However, I don’t think valuation method takes advantage of low interest rates. Using that valuation method, it would not make any difference if they got charged 1% interest rate for debt or 10% interest rate even though it would have an impact on earnings and FCF.
      Also, DF cannot pay off the full debt anyway. $1.1 billion is senior notes that are not due till 2016, 2017, 2018. Since the Dairy business will get a low multiple, it makes sense for them leverage the company to get a better valuation at least 2 times EBITDA. Earnings if you subtract out WhiteWave should be $.60-$.70/share. This does not even include additional ~$.30 in FCF from lower CAPEX. At this price, rest of Dean w Morningstar trades at < 5 times earnings and < 3 times FCF. That is cheap in my opinion. The only major downside to this stock is the valuation of WWAV. However, they just gave numbers for third quarter and they were great! So, the stock should be clear for at least 3 months.

  3. Out of curiosity I checked availability of WWAV to short. IB has over 200k shares with an annual rate of 2.7% which is quite low for a recent ipo.

    • Thanks for sharing! 2012 should be an even more profitable year! Earning are out thursday so we should see if they
      mention the Morningstar sale. Stock has slowly been going down.

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