The Street Doesn't Recognize a Slimmer Dean Foods

In an effort to delever from its massively indebted past, Dean Foods (NYSE: DF  ) spun off its (arguably) most profitable and attractive segment: its plant-based foods business. While I am a fan of spinoffs, the move left parent company Dean Foods as a pure play on milk and dairy products, which have been coming under more and more margin pressure due to the rising cost of feed for the cows. Yet in the company's latest earnings release, Dean Foods showed investors its cost-control measures and pricing strategies had paid off with major revenue growth. Unfortunately for the company and its investors, it made a Wall Street no-no by forecasting under estimates. Wall Street antics aside, is Dean Foods coming around the bend?

Sweet quarter
The stock may have fallen nearly 10% upon release of the company's fourth-quarter earnings report, but there was plenty in the report to be positive about.

Dean Foods posted a very appealing 48% rise in adjusted earnings, or $0.40 per share. The figure easily blew away analyst estimates of $0.30 per share. A year ago, diluted earnings per share came in at a $0.05 loss as a result of the high input costs and low milk prices. This year that number rebounded healthily to $0.20 per share. Revenue rose just under 4% to $3.417 billion. Keep in mind, a year ago the company had the $2.7 billion Whitewave Foods (NYSE: WWAV  ) business under its control. The health-oriented food company is now divested into its own public entity, though partially owned by Dean.

Investors need to remember that Dean Foods is in the midst of a transition -- going from three operating platforms to one. The Whitewave spinoff and the recent sale of the Morningstar division for a net of $887 million were decisions lauded by investors because they showed promise of a leaner, more efficient Dean Foods. But they seemed to have forgotten that without those two divisions, growth would slow. It's a sensible enough concept, I know, but Wall Street is not known for its logic and sensibility.

More changes ahead
Company management also announced it is looking toward a reverse stock split sometime this year, as early as May. In the past year, the company has erased over $2 billion in debt from its consolidation. Including the closed Morningstar transaction (which took place in the early days of this year), Dean Foods' leverage ratio is down to 2.85 from 3.71 at the end of 2012's third quarter. (Author's note: Dean Foods' management does not use the typical debt to equity ratio as their leverage ratio. As stated in the company's SEC filings, leverage ratio is calculated as "the ratio of consolidated funded indebtedness, less cash up to $100 million to the extent held by us and our restricted subsidiaries, to consolidated EBITDA for the period of four consecutive fiscal quarters." ) Since 2010, the company's initiatives have also brought interest expense down more than $100 million to $115 million per year.

Dean Foods may not have the fast-growing, higher-margin segments it did just a year ago, but management seems to be very effective at tightening up the ship for a leaner future. Further cost-cutting measures and a $25- million-per-quarter reduction in interest expense are on tap for 2013.

Misguidance
On the whole, Dean Foods had a great quarter -- keeping sales up in a very difficult environment (commodity prices and margin pressure). This, in my opinion, should be enough to convince investors of management's ability to effectively operate this business in tough times. Everyone looks good in up times; the important time to evaluate is when the business environment is suffering.

Management made one mistake, and it wasn't really a mistake: They gave tepid guidance under Wall Street expectations.

For 2013, the company is expecting mid-single-digit operating income growth while focusing on generating more free cash flow. The company has grown its market share in the fluid milk business over the last two years, but this year a lost bid for a private-label buyer may prevent Dean Foods from growing market share again this year.

As far as the numbers go, Wall Street was expecting more than Dean's 2013 EPS forecast of $1.00 to $1.10. 2012's was $1.39, but of course, included the other two business segments.

As usual, I find Wall Street to have missed the point on this earnings release. Dean Foods' management is very talented and has managed the deleveraging and consolidation process in a smart manner. The milk business is a tough one, affected by declining consumption and lower birth rates, but I believe this team knows how to navigate these waters as they have been for decades.

For more Foolish analysis
It's hard to believe that a grocery store could book investors more than 30 times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse. In this brand-new premium report on the company, we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. We're also providing a full year of regular analyst updates to go with it, so make sure to claim your copy today by clicking here.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 21, 2013, at 8:28 PM, alaxgoaly8 wrote:

    Wouldn't it be best to buy Dean Foods now that it's come down under $16/share and wait until may and get shares of WWAV in the tax-free spinoff? Basically getting a buy one get one deal here (unless of course the ratio isn't 1 to 1, but you get my point). Why buy WWAV now when you can buy DF after a good quarter and selling about $4 under it's concensus target price of $19/share, and still get WWAV in May when the spin-off occurs?

    Am I the only one seeing this play?

  • Report this Comment On February 21, 2013, at 8:52 PM, leaderoftheback wrote:

    You bring up a good point, alax, but I haven't seen that we'll get stock in a spin-off (we don't always; DF retains 50% of the new company and supposedly the profits)...I hope you are right. I'm gonna go look.

    The stock got beat up because it missed on revenues, but milk prices have been going down for the past 3 months. That helps Dean's bottom line on value added products, but their real earnings recovery is going to be because they stop making the bonehead business decisions that they made in the recent past (I'm a milkman, by the way, so I know it when I see it).

    Engles is out (sort of); good thing. EPS continue to improve and easily justify buying at $16 (or 15.75, as I did today). It looks likely that Dean could fall further, so if you don't already own it, save some money to buy more.

    Speaking of bonehead decisions, in the past they would not have lost that big private label deal...they'd take it at a loss. That's a sign that they are being smarter, not less effective.

Add your comment.

DocumentId: 2263603, ~/Articles/ArticleHandler.aspx, 7/28/2014 11:17:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement