Keeping a Buy on Dean Foods

Dean Foods Company (DF - Analyst Report) faced a challenging 2007 due to increased dairy costs. Though costs are expected to be volatile in 2008, the decline in the stock price has provided a buying opportunity, since any relief from high dairy costs will dramatically accelerate earnings growth. The management has focused on the branded products business and reduced stock keeping units (SKUs). The Buy rating is maintained.

The focus on branded products and the acquisition of Horizon Organic improves the company’s scale and the efficiency of the supply chain. The management is optimistic about the realignment of the reporting segments and believes that these changes will add greater focus and clarity to managing the businesses. Its SKU reduction plan is helping the management concentrate on high margin core products and drive further cost efficiencies.

Dean Foods has also initiated a multi-year project in the Dairy segment to improve cost efficiencies by consolidating purchasing and administrative activities. Despite the increased debt-to-capitalization ratio from the decision to spin-off TreeHouse Foods without any debt and the additional debt incurred to pay a special dividend, the management’s actions should create a faster growing and higher margin company once the dairy costs abate.

The stock of Dean Foods Company has traded in a P/E multiple range of 11 to 22 over the last five years. The stock is currently trading at 20.5 times trailing 12 month EPS (depressed earnings due to high dairy costs). The six-month target price of $27.75 is based on a 22 P/E multiple on this year’s earnings estimate.

Read the full analyst report on DF