Dean Foods (DF, Financial) recently came up with better-than-expected third-quarter financial results. The company is witnessing a turnaround as its efforts of narrowing the loss are working well. However, it is struggling due to higher milk prices and expects the same to be soft in the coming quarters, giving Dean Foods a bright opportunity to improve its earnings. Management is now encouraged by the sequential improvement in its operating results and is expecting this to reflect in its current business efforts to drive profitability. Let us have a closer look at the overall business of Dean Foods.
A closer look at the performance
In the recently reported quarter, Dean posted revenue of $2.37 billion also topping analysts’ estimates of $2.36 billion. It posted a loss of $16 million. On the earnings front, Dean posted loss of $0.17 per share which also topped analysts’ estimates. The consensus had been modelling a loss of $0.13 per share. The company is however encourage by the current market trends and also has posted an upbeat outlook. It is expecting the full year earnings to be in range of $0.06 per share to $0.16 per share.
Despite the challenging market conditions and the soft dairy industry, Dean Foods managed to post better than expected results. Its results are revealing its operational excellence and the company is pleased with the sequential improvement in its results. Dean is expecting this momentum to continue in the future as well, and it is now focusing on various initiatives to improve its profitability. It is having its eyes improving price realization, cost productivity and volume. It is expecting these key initiatives to deliver impressive returns in the long term for the company.
An improving portfolio
Dean is also encouraged by several dynamics it is seeing within its fluid milk portfolio. It is expecting an outperformance in this category which will lead improvement in its market share. However, Dean is quite worried about the soft pricing trends. It is now closely monitoring the performance of its branded milk volume with the growing thresholds and price gaps to private labels. It is expecting this higher price points and price gaps between it and private label to put pressure on it portfolio. But still Dean is counting on its loyal customer base. It is expecting this point to least affect its growth momentum in future.
Moving on, Dean is now focused on growing its national distribution by augmenting its DSD capability with new warehouse and extended shelf life capacity. It is also making significant investments in this initiative to further support its objective. It is also bringing in some new products in the market. Its recently launched TruMoo Protein Plus is gaining good traction in the market. With this it is mainly focusing on attracting young adult males, improving its customer base.
The milk market is challenging. The main reason behind this market condition is the increase in the number of exports to New Zealand and China. Due to this almost all major U.S. dairy product export volume saw impressive increase on a year over year basis. It became a key reason for the domestic absorption and depletion in the local markets. However, it is expected that the milk production in the U.S. will increase by 3.5%, creating a strong producer margin which will drive the supply forward. So the long-term prospects of Dean Foods are showing some positive signs.
Dean Foods is expecting the raw milk to remain high due to continued strong global production and demand. In line with this, Dean is also expecting the industry volumes to remain soft but with the improvement in net price realization, Dean is further expecting higher landed costs in the future.
Conclusion
Now moving to its fundamentals, the company is not having any trailing P/E as it is incurring loss. But the efforts seems working for it as its loss is narrowing. But the forward P/E of 18.90 shows good earnings growth in the near term. Looking at its five years earnings growth, the earnings are growing at a CAGR of 15.70%, which is more than the industry average of 13.66%. This is a positive sign for the company as the milk production is also expected to ramp in future which will be another added advantage to company’s growth momentum. Considering all the facts, Dean Foods has definitely got steam and prospects looks strong as well. I would like to suggest the investors to definitely pick Dean Foods in their portfolio.
