The impact of the weak dairy industry is evident on Dean Foods' (DF, Financial) recently reported third quarter results. The company posted a net loss that lead to a erosion in its market share. The main reason behind the back drop is the continued challenge in the dairy industry. Dean Foods is worried about its performance, and to improve, it is focusing on some key aspects.
Dean's moves
The company is focused on becoming the leading provider of dairy products. To achieve this, it is mainly focusing on three key points such as price realization, cost productivity and margin improvement. But this doesn’t seem so easy for Dean as of now. Despite its efforts to turn around, its adjusted gross profit declined by 6% in the past. The company’s turnaround efforts are definitely benefitting it but it seems to be moving at a slow pace.Â
Dean’s situation may not improve soon due to record-high dairy commodity prices, volume softness and significant cost friction. To get rid of this, Dean is engaged in making an effective cost agenda for sequential improvements. Not only domestically, Dean seems to be seeing headwinds on the international front as well. The diary prices in its international markets declined greatly, giving a great hit to its business.
A look at the end market situation
In addition, due to the increasing supply for the world markets the supply production rate also rose at unprecedented rates in export regions. China and Russia are some of the high potential markets for Dean Foods. But the company is also seeing reduced import rates mainly due to the improvement in the Chinese milk supply. Due to this, China has also reduced its forward purchases. This is also expected to hurt Dean’s profitability largely.
Increasing demands all around the world has led the ramp up of exports. But the increase in the exports have impacted the domestic inventory building. As a result of this, the commercial inventories across cheese and butter are on the lower end. But the recent studies have revealed that there has been considerable decrease in the exports and the increase in the imports. With this, Dean is expecting cheese prices to be better, giving some room to Dean for better performance.
Conclusion
Now moving to its fundamentals, a forward P/E of 19.40 indicates that despite poor performance, the company can result in good earnings growth in the near future. But the upsetting profit margin of -0.67% shows suspicion in the stock. In the long term, the stock can be a good 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, investors should wait for the stock to gain market share in future and consider other profitable stocks in their portfolio.
