We have downgraded our long-term recommendation on
Dean Foods Company
) to Neutral from Outperform, based on the uncertainty surrounding
raw material prices. The company projects Class I raw milk prices
to increase significantly in the second-half of fiscal 2012. As a
result, the company guided lower Fresh Dairy Direct's operating
Nevertheless, Dean Foods raised its overall earnings per share
guidance for fiscal 2012 to $1.18 - $1.28 per share from $1.10 -
$1.20 forecasted earlier, on account of a solid second quarter
bottom line performance. For the third quarter of fiscal 2012, the
company anticipates earnings to range between $0.25 and $0.30 per
Dean Foods' second quarter earnings per share almost doubled to 36
cents -- beating the Zacks Consensus Estimate of 31 cents -- driven
by its stringent focus on cost control. The company's net sales
dipped 5.3% year over year to $3,125.5 million and missed the Zacks
Consensus Estimate of $3,241 million. The decline was primarily a
pass-through of lower dairy commodity costs, offset partly by
strong top-line performance at WhiteWave-Alpro.
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
the company's profitability.
Moreover, Dean Foods continues to make headway in its efforts to
achieve the lowest cost position in the industry. The company has
benefited from its continued focus on cost reduction initiatives
across the businesses, including headcount reductions.
It has already achieved its targeted total cost savings of $300
million in fiscal 2011 under the cost reduction program started in
2009. Further, Dean Foods intends to move aggressively toward
streamlining its cost structure.
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The company has taken strategic steps to optimize its capital
allocation and concentrate on core business activities.
Consequently, during fiscal 2011 the company divested its
underperforming business unit operations of dairy processing
facility in the Southeast, and expects more closures in the near
On the flip side, Dean Foods business is heavily dependent on
commodities such as raw milk, soybeans, diesel fuel and others. The
company is anticipating a rise in Class I raw milk prices in the
second half of fiscal 2012, which may negatively impact the
operating income of Fresh Dairy Direct segment in the range of $5
million to $10 million or $0.02 to $0.04 per share.
Additionally, in recent years, the consolidation of the retail
grocery industry has led to increased competition among dairy
product suppliers. In such a situation, Dean Foods faces stiff
competition at the processor level, in all major product lines and
geographic markets. The company competes mainly with
Kraft Foods Inc.
ConAgra Foods Inc.
Dean Foods currently has a Zacks #3 Rank, implying a short-term
Hold rating on the stock.