The Health Play: A Secular Driver That Continues to Roar
Research Director, Mad Money
From: Nicole Urken
Sent: Tuesday, August 07, 2012 4:44 PM
To: James Cramer
Subject: Dean Foods--WhiteWave IPO
As predicted: Dean Foods announces filing of IPO registration statement for the WhiteWave Foods Co.
From: James Cramer
Sent: Tuesday, August 07, 2012 4:45 PM
To: Nicole Urken
Subject: RE: Dean Foods--WhiteWave IPO
Interesting and yes—we predicted—if corn comes down this is a homerun.
In a volatile and uncertain market, we continue to look for secular themes on “Mad Money” that continue to drive stocks. One of our core themes? Health-related stocks that continue to be driven by the push against the rising obesity rates in the United States and around the world.
Dean Foods, which has long been pegged as a traditional commodity dairy company, was one of the biggest losers in 2010. However, the tides have turned. Dave Tepper of hedge fund Appaloosa took a big position in the stock back in January 2011, noting confidence in the debt-laden balance sheet and a turn for the company. The stock, in particular, was a top performer this year, posting stellar results until worries abounded about input prices earlier this summer. That said, its ultimate growth potential has remained a key driver.
While the company’s traditional milk business (about 50 percent of profits) is still significant, its growth in its WhiteWave-Alpro division (about 30 percent of profits)—think Horizon Organic Milk, International Delight coffee creamers, along with almond and soy products—has been underestimated. And its Morningstar division, which is more geared to foodservice and private label retail customers, has also shown strength.
We have highlighted Dean Foods as a domestic security play on “Mad Money,” and Chairman and CEO Gregg Engles emphasized these growth trends on the show as well. On Tuesday after the close, the company announced it would be unlocking value by spinning off its White Wave business—something that allowed the shares to make up the “input cost worry” decline. Most importantly, though, the surge reflects the market appreciation of the strong, organic-product-based business.
The fact that Whole Foods managed to report an impressive quarter—8.2 percent comps with 10.7 percent contribution margin—at the end of July, despite rising concerns about slowing momentum and macro weakness, reflects strength in the organic and health foods category. Pricing power, strong traffic along with unit development keep this story strong. At 32 times earnings, this name isn’t cheap, but given its continued strong execution even amidst a weak economic backdrop with high input prices, upside remains. If macro trends improve, comps could move to double digits along with continued operating efficiencies—and with estimates too low, the stock is likely to continue its upward trend.
Smart Balance, a food company that makes milk, buttery spreads, oils and cooking sprays, is a terrific play on the healthy eating secular trend. But it's also a company that's transformed itself over the past couple years with an increasing focused on natural and organic brands. In fact, spreads, one of Smart Balance's least healthy product categories, now accounts for 36 percent of its sales, down from 68 percent in 2009. In June, the company bought Udi's Healthy Foods for $125 million, which is a further bet on the gluten-free category, one of the strongest in the natural good space that's expected to double in size by 2015.
The vitamin names—Vitamin Shoppe and GNC Holdings—have been big winners. We have preferred GNC on “Mad Money,” particularly as it is more levered to sports nutrition (about 45 percent of GNC sales), which is the fastest growing category in the industry (Vitamin Shoppe has about 30 percent exposure).
Sports nutrition is all about protein powders that help athletes put on muscle, pre-workout regimens designed to improve performance, and post-workout supplements to help with rehydration and muscle recovery. And, GNC carries more private-label products with over 50 percent penetration. Both names recently reported big beats with upside guidance and strong commentary, but GNC remains best-of-breed here and is a buy on any pullback.
Take advantage of a fragmented industry with Lifetime Fitness. On “Mad Money,” we have preferred this one over Town Sports given its higher high-end facilities profile (better amenities) with a membership base that is higher income membership. Lifetime Fitness is improving its in-center revenue and is managing attrition. There has been some recent lumpiness due to recent acquisitions and customer response to price increases, but this remains a solid story with much growth ahead.
This week, even International Flavors and Fragrances, which manufactures flavors and fragrances for food, beverage, personal care and household products companies, highlighted their flavors division as the key driver of outperformance last quarter. In particular, they highlighted health levers as key driver for this business. From the conference call: “Our consistent underlying sales growth remains strong, driven by new businesses wins using our Sweetness and Savory modulation tools to make our customers end products healthier.”
This all sets up well for the earnings of Hain Celestial on Aug. 22. Hain, the makers of Celestial Seasonings teas, Earth’s Best baby food, Terra and Garden of Eatin’ chips, The Greek Gods yogurt and Soy Dream, is a great play on this trend.
Chairman and CEO Irwin Simon has been a regular guest on “Mad Money” as his stock has continued to outperform. Greek Yogurt trends are so strong that even General Mills is trying to play catch-up here. (Too bad you can’t say the same thing about the Greek economy.) Keep Hain, along with the other “health plays,” on your watch list. Secular drivers are key to keep in your investing back pocket.
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