Based on the company’s 9 consecutive quarters of reporting better-than-expected bottom-line performance along with impressive fiscal 2013 outlook, we have maintained our Neutral recommendation on Dean Foods Company (DF). However, we remain concerned about the uncertainty surrounding the fluctuating raw milk prices and intense competition in the dairy product sector.
Owing to improved sales and effective cost management, Dean Foods’ earnings of 40 cents per share for the fourth-quarter of 2012 jumped nearly 48% from the year-ago quarter and exceeded the Zacks Consensus Estimate of 30 cents. The average positive surprise in the trailing 9 quarters comes to 33.2%.
Dean Foods expects the momentum to continue across all its business segments in fiscal 2013. Including the current 80% ownership interest in The WhiteWave Company (WWAV), Dean Foods anticipates earnings in the range of 22–27 cents and $1.00–$1.10 per share in the first quarter and fiscal 2013, respectively. The current Zacks Consensus Estimate for the first quarter and fiscal 2013 stands at 25 cents and $1.09 per share, respectively.
Of late, fluid milk processing profits have been hit by increasing money-offs on private label milk distribution as well as weak sales volumes. In order to counter these headwinds, Dean Foods has implemented strategies like price realization by passing input cost inflation to customers, cost cuts and boosting volume performance. These fundamental steps have facilitated it to step up and rebuild profitability.
Moreover, the company has taken strategic steps to optimize its capital allocation and concentrate on core business activities. Consequently, during fiscal 2012, the company divested its Morningstar business and reduced its ownership interest in its wholly-owned subsidiary The WhiteWave Company.
The net proceeds from these transactions were utilized to retire all the remaining senior secured term debt of Dean Foods, thereby reducing its leverage while increasing financial flexibility to fund future growth opportunities.
On the flip side, Dean Foods’ business is heavily dependent on commodities such as raw milk, soybeans, diesel fuel and others. The prices of these commodities heavily fluctuate; hence, any adverse movement in prices of these commodities will certainly hurt the company’s margins. Further, Dean Foods is anticipating a 10% decline in raw milk prices in the upcoming quarter compared with the fourth quarter of 2012; however, it will remain higher than the first quarter of 2012.
While our recommendation on Dean Foods is based on various positives mentioned above, soft economic recovery, threats of competition and heavy dependence on a handful of customers keep us on the sidelines. The company carries a Zacks Rank #3 (Hold).
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