Today's market action is a rising tide that is lifting all
boats. Well, almost all of them.
Dean Foods (
, which makes a wide range of products found in the dairy section
of supermarkets, hit a 52-week low after announcing that pricing
pressures are forcing profit margins down to historical lows. Many
supermarket chains sell their own dairy brands, and are sharply
marking them down to bring in foot traffic. Dean, which tries to
garner a price premium for its branded products, is ill-equipped to
fight that battle.
Per share profits of $0.24 trailed the consensus forecast by $0.04,
but more importantly, were less than half the take from a year ago.
At this point, investors must try to assess a value for a stock
that represents very limited top-line growth and a shrinking
bottom-line. Don't look to the balance sheet for value -- Dean
Foods carries more than $4 billion in debt. That adds up to $58
million in interest expense every quarter. Operating income is
about twice that, but the company won't be able to handle deeper
price pressures. And you can forget about management's hopes to
grow by acquisitions. The company would be hard-pressed to take on
even more debt than it already has.
Shares of Dean Foods have steadily fallen throughout much of the
last five years, and even as they sit at lows, they have more room
to fall. The high level of debt, shrinking profits and brutal
competitive environment is likely to force investors to keep
fleeing this stock in the sessions to come.
Company Name (Ticker)
|Dean Foods (
|Imperial Sugar (Nasdaq:
|*Based on consenus estimates
prior to recent earnings release
Also in the food sector, shares of
Imperial Sugar (Nasdaq: IPSU)
are off roughly -10%, as hedging activities created a quarterly
loss. Management uses price hedges to guard against big swings in
the price of raw sugar, but gross margins would still have been
zero even without these unhelpful hedges. Imperial profits from the
value-added conversion into refined sugar, but there is often a lag
between price spikes for raw and refined sugar. In this quarter,
that lag was apparent.
But often times the company maintains a respectable spread between
those two factors. For example, Imperial Sugar earned more than
$3.50 a share in fiscal 2006 and 2007 (though it lost roughly $2 a
share in the two most recent fiscal years).
The profit picture should brighten in coming quarters. For
starters, a refinery plant that had undergone renovations is slowly
moving back up to full capacity and should have higher output in
coming quarters. In addition, Imperial Sugar should benefit as some
beverage producers move away from the use of corn syrup and back to
cane sugar. Even if it takes a while for those factors to come into
play, investors can seek solace in the stock's tangible book value
, which works out to around $19 a share, well above the sub-$14
current share price.
is slumping roughly -10% on Monday after announcing that the
Securities and Exchange Commission (
) would like to have a sit-down over Moody's admission that it
didn't follow protocols when establishing debt grading criteria.
This news comes at a time when Moody's and Standard & Poor's
are already under fire for potential complicity in the mortgage
The real question is whether the SEC's investigation (and resulting
fine) will lead to profound structural changes in the way these
firms operate. They have historically operated with very limited
competition, which has been great for pricing and profits. In 2007,
Moody's posted 50% operating income and 31% net profit margins --
among the highest of all publicly-traded companies. Margins have
cooled since then, but are still very impressive. If all of this
blows over, then shares of Moody's are a steal at 10 times (likely
depressed) earnings. Closely watch these investigations. If they
are resolved in a fairly benign fashion, then shares are ripe for a
In a similar vein,
is also off sharply, even though its Standard & Poor's agency
has not yet formally come on the SEC's radar. McGraw-Hill made no
mention of any such activities in its 10-Q filing, and may simply
be suffering from guilt by association.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.