The challenging market conditions, including high dairy commodity prices, softening category volumes, and mix shift of the brands has impacted Dean Foods (DF, Financial) as the company’s performance was not up to the mark in the recently reported fourth quarter. To gain the lost momentum, Dean Foods is planning to focus on key aspects such as price realisation and cost productivity, and it is seeing good improvement through these initiatives.
The short-term will be choppy
The company doesn’t see any major improvement in the market soon. But it is indeed confident of decline in the milk prices in the latter half of the fiscal 2015. Dean Foods is expected to see opportunities in the market with the solid milk production growth. There are other favourable conditions that are slowly driving the demand in the dairy products. On the other hand, in the international markets, China and Russia are Dean Foods’ potential markets and the significant reduction in the imports in these countries will further rebuild its domestic supply. With this, Dean Foods is confident of better near term gains.
Not only in the international markets but also in the domestic markets, Dean Foods is expecting decline in the raw milk costs. This will again drag down the prices in commodities including cheese, butter and dairy milk. This looks happening as the company has already seen significant decline in the prices over the last three months. This will contribute well to the Dean Foods turnaround initiatives.
But Dean Foods is worried about the high raw milk prices still. To deal with it, it is making many market driven placing architectural decisions which are connected to the prices. It is trying to deal with the price gaps with the private labels and other branded white milk products. However, despite headwinds, Dean Foods is confident that it has a best in class portfolio for the refrigerated dairy products in the market. In addition, it also has loyal customer base which it thinks will support its turnaround efforts once it come back on track with the declining dairy product prices.
Trying to improve
Dean Foods is putting efforts to add value to its TruMoo brand. It is bringing in several innovation to make the brand more attractive. Under this, it is making new line extensions into the categories which also includes its new on-trend TruMoo protein plus products. This brand of the company is holding a good edge in the market and also has secured about 10% share on the refrigerated protein beverage segment. This will surely be a key growth driver for Dean Foods in the upcoming quarters. Dean Foods will be further investing in TruMoo’s growth with efforts such as consumer advertising, new flavour offering and ramping up the promotional activities during the peak seasons.
Conclusion
With these efforts Dean Foods is thinking to return back to its historic performance levels, improving its market share. Stock with a forward P/E of 19.40 indicates that despite poor performance the company can result in good earnings growth in near future and as the company is seeing decline in the raw milk prices the stock can be a good long term holding as in the next five years its earnings are growing at a CAGR of 14.30% as compared to industry average of just 13.16%. So as of now the investors should pick up Dean Foods as it is growing and will definitely turnaround in the coming days, gaining market share.
