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On May 13, 2014, Zacks Investment Research downgraded the global consumer products company, Dean Foods Company (DF - Analyst Report), to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Shares of Dean Foods slipped nearly 9% after it reported dismal first-quarter 2014 earnings on May 8, 2014.

The company’s bottom line was mainly hurt by high raw milk prices, which resulted in an adjusted loss of 5 cents per share from continuing operation compared with adjusted earnings of 31 cents in the year-ago comparable quarter. Moreover, it missed the Zacks Consensus Estimate of 2 cents per share.

Though the company’s top line surged 2.1% year over year and went ahead of the Zacks Consensus Estimate, the positive sales results did not carry down to the income statement as operating income declined on a comparable basis from a year-ago.

Adjusted operating income for the quarter decreased 90.8% to $6.9 million from the prior-year figure of $74.2 million. Consequently, Dean Foods’ adjusted operating margin for the quarter contracted 290 basis points (bps) to 0.3% from 3.2% a year-ago.

The year-over-year decline in operating income was primarily due to higher raw milk prices. The raw milk cost of Class I Mover registered a year-over-year increase of 22% and touched an all-time quarterly high of $22.38 per hundred-weight.

Looking at the current industry volume trends, Dean Foods expects higher raw milk prices and weak volumes in 2014. Therefore, the company has lowered its earnings guidance for 2014 to 60 cents per share from the earlier projected range of 73–86 cents per share. Furthermore, Dean Foods expects to report adjusted loss in the range of 2—8 cents per share for the second-quarter of 2014.

The company’s dismal results and a discouraging guidance triggered a downtrend in the Zacks Consensus Estimate, as analysts became less constructive on the stock’s future performance. The Zacks Consensus Estimate for fiscal 2014 fell 24.1% to 60 cents in the last 7 days, while the second quarter estimate moved in the negative territory to a loss of 5 cents from earnings of 17 cents projected earlier.  

Other Stocks That Warrant a Look

Some better-ranked stocks in the food industry that look promising and are expected to continue with their upbeat performance include B&G Foods Inc. (BGS - Snapshot Report), The Hain Celestial Group Inc. (HAIN - Analyst Report) and Pinnacle Foods Inc. (PF - Snapshot Report). While B&G Foods has a Zacks Rank #1 (Strong Buy), Hain Celestial and Pinnacle Foods carry a Zacks Rank #2 (Buy).

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