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
) 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
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Published on May 11, 2012
By Leo Sun