Is This Dairy Stock Headed for a Turnaround?

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Dean Foods (NYSE: DF  ) has traveled a long and bumpy path of disappointment over the past few years. In 2010, the country's largest dairy producer was No. 6 on the Fortune 500 worst performing stocks list. Yet, nearly two years later Dean is back as a more cost-efficient version of its former self. Last week, shares soared to a 52-week high. Let's dig in to find out if the company can pull off a meaningful comeback.

Milk it
Not long ago, Dean Foods was fighting for its life as rising commodity costs and demanding distributors dampened the company's cash flow and pressured margins. Grocery store chains including SUPERVALU (NYSE: SVU  ) and Kroger began discounting milk and taking it out on suppliers such as Dean Foods. Adding insult to injury, the retailers spun off dairy products to sell under their own private labels and offer at a fraction of the cost of Dean Foods-branded milk.

The company seemed to be slowly falling apart. It sold a piece of the business known as Mountain High Yoghurt to General Mills in 2010, and made numerous other asset sales in an attempt to pay down debt. The stock remains debt-heavy today, although earnings are gaining speed and margins are widening -- signaling a long-anticipated turnaround. Last year, in fact, more than 80% of U.S. households purchased a Dean Foods product -- pushing net sales to $13.1 billion.

Call it a comeback
The milk stock closed last week on a high note, boosted by a 50% jump in first-quarter profit. Earnings per share grew 121% to $0.31, which was up from $0.14 in the year-ago period. More importantly, the news marked the sixth consecutive quarter in which Dean Foods generated adjusted EPS that beat internal forecasts.

The Dallas-based company's impressive earnings were driven by strong growth across all three of its business units. Sales in the coffee creamers and beverages segment were particularly robust -- increasing 20% in the quarter.

Additionally, the company countered rising commodity costs by hiking prices. This is particularly encouraging considering Dean Food spent years backpedaling, while industry peers such as Kraft Foods (NYSE: KFT  ) and ConAgra (NYSE: CAG  ) successfully challenged ascending prices by pushing markups through to consumers. As of this report, it seems Dean Foods is finally taking some pages out of their playbooks

Another upside in its latest report was the company's WhiteWave-Alpro segment, which continued to benefit from the country's obsession with healthy eating. The U.S. organic market grabbed $31.5 billion in sales last year, of which organic foods and beverages accounted for more than $29 billion.

Thanks to this trend, Dean Food's higher-margin nondairy lines including its Silk soymilk products and Horizon Organic brands climbed 13% from the same period a year ago, to a record high of $571 million. And even with the majority of Dean's revenue coming from Fresh Dairy Direct, the company was able to grow operating profit in that segment by 18% to $101 million in the quarter.

What the future holds
A decline in the commodity price of raw milk should help fuel the turnaround. And the organic business is also helping to power a rebound for the company. In an interview with CNBC last week, CEO Gregg Engles said, "We're in the middle of a long-term and very powerful trend of better eating. That's certainly showing up in the profit and growth rates of that side of our business."

While Dean Foods still has a lot of debt on the books, management is taking the necessary steps to reduce that leverage. The stock currently trades at 11 times forward earnings and is growing quarterly earnings at a rate of 50% -- not bad for a company that just a few years ago was struggling to make ends meet. Dean has made a believer out of me, despite its sack of debt. That's why I'm giving the stock a three-year outperform rating on my profile in Motley Fool CAPS.

Sip on this
This could be the momentum the company needs to get back on track after years of declining sales. Management raised its guidance for the second quarter from EPS of $0.22 to $0.33, although Engles was quick to note that the company still faces many challenges going forward. Assuming management remains focused on cost-cutting initiatives, I believe the stock will continue to rebound in the quarters to come. For more conservative investors who'd rather not wait for a turnaround, I encourage you to read this special free report titled "The Stocks Only the Smartest Investors are Buying." The report isn't available for long so click here for instant access -- it's free.

Fool contributor Tamara Rutter does not own shares of any companies mentioned in this column. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Dean Foods. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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