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Why Dean Foods Co's Shares Popped 15% Today

By Travis Hoium – May 8, 2018 at 11:43AM

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Sometimes a net loss can get investors excited.

What happened 

Shares of food and milk supplier Dean Foods Co (DF) jumped as much as 15.3% in trading Tuesday after reporting first-quarter earnings that showed a nice improvement in the business. At 11:30 a.m. EDT shares had stabilized at a 10.6% gain on the day.

So what

First-quarter revenue fell less than 1% to $1.98 billion, topping the $1.85 billion estimate by a wide margin. The real improvement was on the bottom line where a $9.8 million loss a year ago turned into a $265,000 loss. On an adjusted basis, which pulls out one-time costs, earnings were $0.14 per share, $0.04 ahead of estimates.

Milk being poured into a glass.

Image source: Getty Images.

Management said that cost-cutting measures have helped the business early in 2018 and they expect the progress to continue, reaffirming adjusted earnings guidance of $0.55 to $0.80 per share. I'll note that guidance wasn't increased, despite the strong quarter, so management may not have the visibility needed to up guidance for the entire year.

Now what

Dean Foods has been extremely volatile as the price of milk has put pressure on margins and consumers have trended away from milk-based products like ice cream and sour cream and toward flavored waters and healthier foods. That's forced Dean Foods to cut costs, which is really the only option right now. This may have been a solid quarter from a cost perspective, but I don't see much value in shares, which trade at 11.5 times the top end of guidance. Plus, Dean Foods' revenue is shrinking, which isn't a great sign for any company. The market may like this earnings report today, but I'm not a buyer given the long-term pressure in Dean Foods' business.

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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