Dean Foods (DF) Flattens Street Expectations as Profits Soar 50%

Dean Foods (DF: Charts, News), the largest American dairy processor and distributor by revenue, surprised Wall Street with strong first quarter earnings that rose more than 50% over the prior year. The company is best known as the parent company of Horizon Organic Dairy brands and Silk soy milk products.

Dean Foods posted a profit of 20 cents per share, or $37.9 million, a solid increase from the 14 cents per share, or $25.3 million, it posted a year earlier. Excluding one-time restructuring charges, Dean Foods earned 31 cents per share. Its adjusted earnings were far higher than the company's previous estimate of 18 to 23 cents per share, and easily topped analysts' expectations of 21 cents. Revenue grew 5.4% to $3.21 billion, topping analysts' expectations of $3.13 billion. Dean Foods attributed its strong earnings to aggressive cost reductions, stronger pricing power and higher sales volume in its core fresh dairy business. Daily Chart
Looking ahead, the company expects second quarter earnings between 28 and 33 cents per share, outpacing the analyst consensus of 22 cents. For the rest of fiscal 2012, the company increased its full-year earnings per share to a range between $1.10 and $1.20, up from its previous February forecast of 87 cents to 95 cents per share. Dean Foods management attributes the positive outlook to expected savings in overhead and interest expenses. A slight dip in gross margin, from 24.6% to 24.5%, was deemed insignificant last Wednesday as shares rallied over 10%. "We expect strong full year growth across the business," CEO Gregg Engles stated optimistically. "Given our significant momentum in the first quarter, the cautious optimism that we expressed last quarter has turned less cautious." The rise of milk costs, the company's most important expense, has recently leveled off, as grocers such as Kroger (KR: Charts, News) have aggressively marketed lower-cost milk to fend off private-label competitors. Raw milk costs rose 8% over the prior year quarter, but decreased 8% sequentially from the previous quarter. As a result, Dean Foods' Fresh Dairy Direct segment, its largest source of revenue, increased its operating profit by 18%. Fluid milk volume rose an adjusted 1.8%, while net sales grew by 4%. The WhiteWave-Alpro segment, which sells ice cream, yogurt and other dairy-based organic products, reported a 13% increase in sales, along with a 31% gain in operating profit. Analysts have long speculated that Dean Foods may spin off WhiteWave-Alpro, which has excited potential investors, but Engles quelled rumors, stating that it is a "highly valuable property" and a "fabulous business." "Today we announced strong first quarter results, driven by stronger than forecasted growth across each of our three operating segments, and supported by tight expense control across the business," Engles reported. Dean Foods is undervalued fundamentally, trading at 12.6 times forward earnings, compared with the industry average of 17.8, with a 5-year PEG ratio of 1.01. Investors should beware of rising commodity costs, which could threaten to derail food product stocks. Food cost inflation is also a long-term threat. Rising milk costs in 2010 and 2011 derailed the company, eventually forcing it to take a $1.6 billion writedown last November. The stock doesn't pay a dividend, but its low beta of 0.8 may make it a conservative choice for a potentially turbulent summer. Shares are trading near its 52-week high. Other News About DF SharesofDeanFoodsriseonprofitgain Dean Foods rallies strongly on an excellent first quarter. DeanFoodsSharesSurgeonGuidance, Strong 1Q Looking ahead, Dean Foods CEO sees nothing but clear skies. Other Stocks in the News Where'stheBeef ? NotinWendy'sResults Wendy's misses estimates as it trails industry leaders. ChinaGrowthShiftSplitsKFC, Hydraulics Are any companies better positioned than Yum! Brands to capitalize on Chinese growth? Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on May 11, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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