What: Shares of Dean Foods (NYSE:DF) went sour on Monday morning, falling as much as 17.9% in early trading. The food producer and distributor reported second-quarter results before the opening bell. Investors discarded a strong bottom-line showing to focus on soft top-line sales and the mysterious departure of a key business leader instead.
So what: In the second quarter, adjusted earnings of $0.33 per diluted share handily beat analyst estimates of $0.26 per share. In the year-ago period, Dean reported a net loss of $0.14 per share.
Sales decreased 19.2%, landing at $2.0 billion. Analysts had been looking for $2.1 billion.
Looking ahead, Dean set a third-quarter earnings guidance range between $0.17 and $0.27 per share. The midpoint of this guidance sits just above the current analyst view of $0.21 per share. Margins are on the rise, and management likes this "generally favorable commodity environment."
If none of these facts seem likely to trigger a massive share price drop, you're absolutely right. In an SEC filing posted after Friday's closing bell, Dean Chairman Tom Davis announced his resignation, effective immediately and with no further explanation.
That'll do that trick.
Now what: Losing the chairman of the board is always distressing for investors, because you never know if the replacement will be better or worse. Under Davis' two-year watch, Dean's sales have been unpredictable but profits were steady and cash flows improved markedly in recent quarters.
It's worse when investors don't get much explanation for the change. Here's the full text of Dean's regulatory filing on the matter:
"On August 7, 2015, Tom C. Davis resigned from the Board of Directors of Dean Foods Company (the "Company"). Mr. Davis served as the Chairman of the Board of Directors and on the Company's Audit Committee, Compensation Committee and Executive Committee. Mr. Davis' resignation is effective immediately."
The earnings report didn't mention Davis at all, and Dean's slide deck for this morning's earnings call also avoided the matter. CEO Gregg Tanner addressed the matter front and center in the earnings call, but without any insights regarding the reasons why:
"I'd like to acknowledge his 14 years of service, and note that he leaves at a time when we feel more optimistic than ever about the future of Dean Foods," Tanner said.
Prodded by analysts on the matter, Tanner could only reiterate that statement. Cynics might assume that there's a scandal brewing here. Call me a Pollyanna if you will, but the simpler and more likely explanation is that Dean can't talk about a more mundane personal matter of Davis.
Which means that today's drop very likely is overdone, setting Dean up for a solid bounce in the near future. The company or Davis himself could publish more detailed reasons for his departure, the new chairman could be a handpicked food industry superstar, or continued solid results in next next few quarters could just make investors forget about this issue.