The entire business of Dean Foods (DF, Financial) was negatively affected by significantly volatile raw material costs including higher volume declines primarily due to expanding retail prices, poor margins for its branded milk product offerings, reduced margin for its Class II products and greater costs linked to the different shrink forms.
Recovery in the cards
Going forward into 2015, Dean Foods is witnessing a major fall in prices of domestic fluid milk due to several key reasons including, healthy worldwide milk production growth serving a superior feed cost, declining farmer margins and hard weather conditions, lowering of the demand for dairy products and momentous decline in Russia and China imports, rising domestic supply which is exceeding demand along with seasonal stocks redevelopment, major fall in U.S. exports and the improving U.S. dollar.
The significant price decline due to an oversupply in the market is significantly hurting the company’s growth margins.
During the fourth quarter, collective volumes of all its products particularly for fluid milk reported a 2% year-over-year decline to 683 million gallons.
In the quarter, Dean Foods experienced 4% expansion in the food service channel on a year-over-year basis.
Dean Foods registered a major price fall across its products portfolio except the food service channel which is not believed to significantly help the company rise from this declining pricing situation.
There was significant fluid milk cost in the quarter that continuously and poorly impacted the general category health by resulting in considerable fall in the category volumes.
A closer look at the different segments
For the grocery retail channel, Dean Foods brands averaged $4.8 per gallon for both the third and fourth quarters, an increase of $0.24 compared to the fourth quarter of 2013. Moreover, there was a 6% increase in the price gap between its brands and private label on year-over-year basis to $0.66 from $0.62 for this year. These huge price gaps between the brand and private label are continuously putting pressure on the overall branded portfolio.
The declining market price for the milk products and a significant price gap between the private label and Dean Foods brand offerings is greatly and negatively impacting the latter’s margins.
Considering the flavored milk category, the general volume of the flavored milk declined 2% during the quarter and on a year-over-year basis. This sharp decline in the volumes is particularly seen within the major format channel. The overall weakness in flavored milk category volumes is mainly due to the continued elevated prices at retail and not due to a basic change in consumer trends.
The solid ability and comprehensive shelf life of the company’s national brand TruMoo is spread across its key market and continues to allow distribution expansion into warehouse channels past its DSD networks.
The flavored milk segment of Dean Foods is also reeling with the sharp volume declines mainly due to the higher product prices. However, Dean Foods is focused on launching innovative brands to reposition its image and partially offset the major volume decline due to continued price fall.
In 2014, Dean Foods concluded the last of its plant shutdowns linked to its continued efforts for network optimization. These initiatives led to the closure of 12 plants in an 18-month period. It has lowered excess capacity in its network and thus driving improved asset realization and enhanced efficiencies.
Going forward, the volume reduction in the first quarter of 2015 is expected to be in mid-single digits range as against last year. The sharp decline in the dairy complex is believed to further bring down the company margins for its branded assortment of fluid milk products and its dropping cost. Dean Foods expect to continue its cost cutting initiatives to lower its current cost level and beat yearly inflation impacts.
Dean Foods continued efforts to reduce costs by shutting down a majority of its production units is estimated to help the company become profitable in a long term.
In 2015, more than $60 million is forecast to be invested throughout digital, print and TV platforms to educate consumers about milk being a major naturally occurring protein dense foods present to date and is believed to significantly expand the consumer demand for milk products and thus benefiting the foods major.
Conclusion
Overall, the investors are advised to avoid investments into Dean Foods Company looking at the extreme overvaluation of the stock, illustrated by the forward P/E of 15.98, going forward. The PEG ratio of 1.39 suggests slower company growth. The profit margin of -0.21% indicate no profit but loss. Dean Foods is also under huge debt with total debt of $917.18 million against the total cash position of $16.36 million only.
