Dean Foods (DF, Financial) reported some mixed numbers last quarter with marginal growth in revenue compared to last year while the company plunged into losses from a year ago period of profit. It was mainly on account of the continued challenges in the dairy industry. In spite of such a disappointing environment its stock price flared up, touching its 52-week high few days back. Moreover, there has been improvement in its operating income on a sequential basis, which reflects the management’s effort to bring the company back on track. Let’s see in detail what lies for Dean Foods in the days ahead.
A look at the weakness
The numbers were severely affected by higher milk prices. However, it came above the street expectations, which is one of the primary reasons that boosted its share price. And to keep the situation under control, the management is working hard on three main aspects namely price realization, cost productivity and volume at margins that deliver an appropriate return.
The rising raw milk prices in both class I and class II products squeezed its margins considerably. To mitigate the effect of increased prices, Dean has taken various initiatives in this direction. It is augmenting its DSD capabilities with new warehouses at various locations and will also extend the shelf life of its products. Along with this, its cost cutting strategies, which began in late 2012 with the closure of some facilities has enabled the company to maintain its stand in such a challenging environment.
Restructuring the business
By mid of 2014 Dean had closed twelve plants causing its third-quarter gross profit margin per gallon to increase by $0.026. Although, plant closures in itself may not be good since it will reduce production, which will further boost its cost. Not only this, fewer facilities means; it will have to go extra mile to deliver its products from existing plants.
However, considering the present scenarios it seems to be the best thing to do and as far as going an extra mile is concerned its new warehouses will help sooth some of its ill effects. Going forward, the management is confident that such efforts will help the company to return to its historic levels of network optimization.
In addition, Dean continues to invest in building its brand, which received a positive response from consumers. A perfect example that can be cited for this is its TruMoo brand, which has secured significant share growth in food, drug and convenience channels and reached a new all-time ACV (all commodity volume) with secure distribution in 72% of the US shelves.
Conclusion
These efforts are quite encouraging, helping the dairy company to stand its ground. It is difficult to predict the turnaround in the global milk industry, but when it does happen Dean Foods is prepared to take advantage. Currently it does not have any trailing P/E but a forward P/E of 18.41 is indicative of improving earnings. Moreover, its stock performed fabulously in spite of a loss in the last quarter, and considering its bright future prospects we could see more upside to this stock in the coming months.
