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Hi Jim,
I went and bought some on the strength of the numerical argument.
However, I do wonder about several things:

- How healthy is DF milk? I think the trend for avoiding antibiotics and hormones in milk (and other foods) is accelerating. Here is one anecdotal reason: for the first time I heard a _mainstream_ doctor, Marisa Weiss, founder of breastcancer.org, publicly say on NPR that she is going organic. My sense is that mainstream doctors and their official organizations (as opposed to individual renegades) are very cautious about the whole issue of supporting organic food, and I almost swerved off the freeway when I heard the interview.

- What would change the loss leader use of milk? Butter and milk are such staples that everyone is aware of the price. And even though I like organic, I go with store brand (Whole Foods).

Thanks for the good work.
tj
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Hi tj,

How healthy is DF milk? ... My sense is that mainstream doctors and their official organizations (as opposed to individual renegades) are very cautious about the whole issue of supporting organic food

Dean Foods has a whole division (Alpro, I think the name is) devoted to organic and soy milk (pretty sure they put the soy stuff into that division). And it is growing strongly.

I've never purchased Dean Foods milk, but a colleague here has and he says it tastes better. How healthy is it? Probably no more or no less healthy than house-brand milk. My colleague says that Dean Foods, at least the brand he tried, uses a different color container to protect the milk from the effects of light. Is that necessary or a marketing tool? I don't know.

I think the reason that doctors have been so reluctant to support organic food is many-fold. First, I'm pretty sure there's been no real scientific study (randomized, double-blind) on the differences between organic and "regular" food. It's mostly been anecdotal evidence, which isn't very reliable given the human propensity for selective memory.

Second, there are a whole bunch of other factors affecting a person's health that isolating organic food as a key factor is really difficult.

Third, not everything labeled and sold as "organic" is "better" than regular food.

Another point: I'm reasonably certain that bovine growth hormone (used to increase production of milk) has been used for years and years with no measurable problem in humans attributable to its use.


What would change the loss leader use of milk?

Grocery store economics, if anything. In the last earnings conference call, management said that if grocery stores knew then what they knew now, they would not have gone down that path (or words to that effect). Backing out is going to be difficult as consumers will be resistant to increases, but I've heard rumbles that oil is supposed to continue increasing in price through 2011 and that can certainly be used as an excuse to back out of the loss leader situation. (You may have already noticed that December gasoline prices are pretty high, even though winter is traditionally a low-price season.) It's going to take a while, though. Just as the price came down over the course of a year or more, it's going to take time to bring it back up toward previous levels.

Cheers,
Jim
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FWIW, Deans does offer a line of rBGH-free milk and has a posted policy stating both arguments for & against the use of growth hormone.
It is a very political hot topic at this point.

Deans posted stance is to consistently offer both products & let the market drive increased production.
From Deans website: Are all Dean Foods products now artificial growth hormone-free?
Not yet, but we hope that as more consumers request artificial growth hormone-free milk, demand will spur more supply and we can offer more natural products.
and
Dean Foods is proud to offer consumers and retailers another high quality and nutritious milk choice. We are committed to providing families with milk that is fresh and delicious, and that has been assured to be artificial hormone-free by exacting regulations.

I like the choice Jim. Deans products are locked into many the managed order guides (food speak for "managers must order for company to receive vendor rebates") within my company.

I'm adding to watchlist & CAPS.

Regards,

Kent
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Hi Kent,

Thanks for the extra information.

In the debate on bovine growth hormone, does the fact that it is usually recombinant BGH (that is, made by a bacterium or yeast [not sure which]) matter? If so, I wonder why.

Recombinant proteins (rBGH is one such) are much cheaper to produce in large quantities, compared to collecting from the animal or plant that normally makes the protein. We've been using them for years. Insulin for diabetics, for instance, used to be collected from sheep, but is now made in a vat by bacteria. I would venture to say that all biological drugs (proteins) are made in a vat and their safety is tested thoroughly. (That is, I'm referring to the safety of the manufacturing, not to the safety of the drug, which is a different issue.)

Or is the debate on BGH there regardless of source for the protein?

Cheers,
Jim

Aside: While Googling "rbgh manufacturing" found the following link to a 2000 decision by the FDA to not reverse its 1993 decision to allow Monsanto to sell Posilac (its branded rBGH). http://www.fda.gov/AnimalVeterinary/NewsEvents/CVMUpdates/uc...
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FYI

The debate does center around rBGH (synthetic). Monsanto's Posilac has been the poster child for both sides of the debate (Consumer-harming evil empire/Consumer-responsible technology leader). rBGH is primarily administered to livestock to increase milk production 10-15%.

At issue is not the safety of the synthetic growth hormone, but the hormone's short term affects on the livestock & the long term affects to humans that consume products created through it application.

Consumer protection and health advocacy groups claim that 1993 FDA approval was based solely on the 90 day rat study (mentioned in your link) and did not include long term studies on the affects to humans. Monsanto successfully demonstrated dairy produced from cows treated with rBGH cannot be distinguished from untreated cows (as BGH is a naturally occurring hormone).

The primary argument is whether rBGH use in livestock increases the production of a secondary hormone IGF-1 which has been shown, in some studies, to trigger increased rates of some human cancers.

Animal rights activists claim that cows treated with rBGH have increased udder mastitis (which leads to more antibiotic usage - a different story altogether), increased hoof disease, greater rates of calf birth defects, intestinal disease, malnourishment...

rBGH is currently banned in Canada and under moratorium in the EU.

As a food professional I have tremendous access to local farm fresh rBGH-free products that are cost neutral. I personally feed my kids non rBGH food & use it exclusively in my work but mostly because I can (why not?). Many will say this isn't germaine to an investment conversation. I too see the winds of public opinion perhaps blowing more to the 'natural milk' side & am glad Deans is covering both sides.
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Hi Kent,

Thank you for the additional insight! I must admit, being a former scientist, I'm skeptical of claims made to the media that are often aimed at trying to change people's attitudes and/or drum up support. Those claims often lack data that demonstrate that the agent of concern is really an agent of concern, if you get my meaning. I have not followed any of the research on this debate.

I agree that it is good to see Dean Foods happily selling to anyone who is concerned or not.

Cheers,
Jim
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Jim,

I agree with your sketicism.

However, US is the pretty much the only developed country to allow rBGH. There is a body of growing science (or perhaps enough agents of concern) that I believe we will someday see sweeping dairy change.

SBX, CMG, WMT, KR, & many other companies all have rBGH-free policies/practices.

Thanks for all you do, I enjoy your posts.

K
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This stock seems to have a lower reward/risk ratio than all the others in MUE. It is not particularly cheap despite MUE given its margins and revenue growth. FWIW, I always check the EV/EBITDA and P/FCF of any company and prefer it to DCA. It has helped me reach similar conclusions for the most cased to TMF analysts who use DCA to identify deep values. All other stocks in MUE were much lower on these two parameters.

Would it be fair to say that this is less of a deep value that others in MUE? It appears PWER despite its 22% rise since rec is still a good value. What do you think?

Anurag
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Hi Anurag,

I'm not really looking at these companies with other multiples like EV/EBITDA or EV/FCF (or P/FCF). I'm looking at what the market is expecting at today's price and then considering if that's reasonable or not. Some will undoubtedly appear cheaper than others on such metrics, but that's not the driving force behind this.

Dean Foods, if they can continue on their cost-cutting path, should be able to expand margins, even with the low retail price of milk nowadays. That will make them look better down the road and the price will be driven up. In my write up, I pointed out that even a 2% growth in FCF for five years, 1% for five years, and 0% after that, if the expectations turned to that, the price would see a nice boost.

With this company, I don't think the margins will ever be very high, but the low margins seen today shouldn't be what the company is capable of down the road.

Others, such as Power-One, may have more oomph behind them, so could give a really good return, but Dean Foods, even changing expectations by a few percentage points, should do well for the portfolio.

Cheers,
Jim
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