Dean Foods Co. (DF, Financial) is the largest dairy producer in the U.S. The stock has done poorly with low milk prices and the loss of a Wal-Mart contract. Though the price is down, it is difficult to find a reason to buy this stock.
The stock trades for $11.62, there are 91.07 million shares and the market cap is $1.058 billion. Diluted earnings per share are 45.8 cents and the stock trades at a price-earnings ratio of 25.3. The dividend is 36 cents and the dividend yield is 3%.
Since earnings are down, profitability numbers are too. Operating margins are 0.53% and return on equity is 5.26%. The price-sales ratio is 0.13, which is dirt cheap. For the first nine months of 2017, free cash flow was $5 million and EPS was a loss of three cents.
Sales dropped from $9.5 billion in 2014 to $8.1 billion in 2015 to $7.1 billion last year. Yikes! Free cash flow has been decent at $3.5 million in 2014, $246 million in 2015 and $142 million in 2016. The balance sheet shows $24 million in cash and $674 million in receivables. The liability side shows $648 million in payables and $947 million in debt. This is not too terrible. I wrote an article a few years ago about Dean Food's debt. The debt did pay off, but the stock has gotten pummeled since then.
Dean produces dairy under popular brand names such as Alta Dena, Land O’ Lakes, Model Dairy, Swiss Premium, TrueMoo and many others. The company purchases 10% of U.S. milk from 4,350 farms. Dean serves 33,000 schools. That last statistic is impressive. Around 69% of revenues come from milk, 14% from ice cream, 5% from cream, 3% from coffee creamers, 4% from cultured and the rest from other sources. Dean has 66 manufacturing facilities in 32 states.
Dean lost a big contract with Wal-Mart (WMT, Financial) last year, which has hurt. Standard & Poor's predicts sales will rill 2.1% in 2018. Dean purchased Friendly’s Ice Cream last year for $155 million in cash, which S&P thinks will help a little. The rating agency expects EBITDA margins to fall to 4.4% this year from 5.9% last year due in rising milk costs, volume deleveraging and increased marketing spending. S&P expects earnings per share of 96 cents in 2018. Not bad if that happens—the P/E ratio would be 12 on today’s stock price.
According to S&P, Dean’s largest customer in 2016 was Wal-Mart (including Sam's Club), which accounted for about 16.7% of sales. In March 2016, Wal-Mart Stores announced plans to build a dairy processing plant to supply its stores in the Midwest. Dean expects this plant will result in the transfer of about 90 million to 95 million gallons of private label milk volume in 2018 and 2019. The company expects to continue to supply private label milk for other Walmart locations across the U.S.
Hedge fund Vv Value has an 8.2% holding. This could be good for the stock. A 13-D must be filed when an entity owns more than 5% of a company and plans to engage management. Perhaps the fund has some ideas that could propel the stock higher in value.
I was curious to see if you could buy milk through Amazon (AMZN, Financial). Sure enough, you can. Good news for Dean because the first milk to appear is its Tuscan brand. I also see Horizon, which is owned by Danon and used to be owned by Dean.
As for milk prices in 2018, an article from Dairy Heard Management states, “A massive national herd, burgeoning supplies, declining domestic demand and a strong dollar should indicate prices might dip lower before they improve.”
What I find interesting about Dean is its profit margins always seem so mediocre. You would think the company would have higher margins as a foods company, but I guess milk is different. Would I buy the stock? I am not excited. It could be a good value stock, but what does the future portend? I do not know. Are profit margins ever going to be decent? I do not know about that either.
Disclosure: We do not own shares.
