Today, WhiteWave Foods ($WWAV) made its public debut on the New York Stock Exchange. Although the stock’s opening hours saw little follow-thru from in its initial pricing, the sponsors of the stock reaped the benefits of pricing more shares than anticipated at a price significant above the originally expected range – a practice relatively common for a favored IPO. WhiteWav makes some great milk products – Horizon Organic, Silk and International Delight. WhiteWave’s stock opened at $19 on the NYSE, up 12% from its initial public offering offer price of $17, making the deal the latest “hot” natural- and organic-food IPO. However, this isn’t a story about WhiteWave, but rather its parent, Dean Foods, and a stock recommendation based on this spin-off.
I’ll admit out of the gate that there are worse cases of investors being whipsawed than this one, but this is another example of why following Wall Street Analyst recommendations can hurt your neck.
Let’s roll the clock back two weeks ago. Mid-tier Wall Street firm Stiefel Nicholas raised the rating on Dean Foods ($DF) from Hold to Buy with a new $18 price target. The report noted in its upgrade, “we are particularly attracted to the near-term value creation flowing from the announced split-up of the company. … WhiteWave is due to be spun-off in an IPO around year-end 2012, the company confirmed it is seeking a buyer for its Morningstar division (roughly $1 billion in gross value by our estimate), and the dairy business, while likely to be challenged by higher milk prices over the next six months or so, maintains a very low implied valuation based on the current stock price.”
At the time, Dean Foods was approximately $15 per share or roughly $2.8 billion in equity value, and $3.4 billion in long-term debt for a total market capitalization of approximately $6 billion. As the Stiefel appropriately noted, WhiteWave itself represented almost all of Dean Food’s current equity value. With Morningstar by their estimate worth another $1 billion, the underlying Dean Foods’ core business was receiving little value from the market. WhiteWave would carry with it approximately $1 billion of debt through the spin-out, the core business was only being valued equal to the remaining debt at about $1.4 billion.
By the following week, the underwriters released the price talk of the IPO which confirmed that WhiteWave was being valued at Dean Foods’ entire equity value, and the stock climbed to $17 per share. Dean Foods was offering the public a new class of stock from the one they owned that would attribute economic value to the public, but limit their ability to vote. For all intents and purposes, Dean Foods would continue to control WhiteWave with 99% of the voting power, and 87% of the economics. As expectations emerged that WWAV may price above the range, Dean stock followed course ending last night at $18.80, or roughly an increase of $700 million in value.
WhiteWave opened this morning at $19 per share, or 30% higher than originally anticipated. That equates to roughly $500 million in market value more than expected. Although the value of the two linked assets appeared to move hand-in-hand, not more than two weeks after their buy upgrade, Stiefel Nicholas downgraded Dean Foods.
What was their reasoning for the downgrade? They believe, “the company is now facing a rising dairy cost environment.” Now? As opposed to the cost environment two weeks ago? Dean Foods opened down 15% this morning.
In his defense, the analyst made the right analysis of the stock on October 12th. Dean Foods underlying core business was likely undervalued considering the value of the assets it owns. His target price on that date was $18 per share, a value that was exceeded before his downgrade. However, as the fluidity of valuing the asset changed, the price target in theory should have flowed with it.
There’s one final rub. Since the downgrade took place prior to the market opening today, the analyst will likely get “credit” for downgrading the stock at $18.80. However, anyone who wished to act on that recommendation sold it 15% lower, and only just above his upgrade recommendation two weeks earlier.
Edit: WWAV has not held its $19 open. Despite being down $2, DF has rebounded almost $1.50