Dean Foods Stays Neutral

We maintain our long-term Neutral recommendation on Dean Foods Company ( DF - Analyst Report ) with a target price of $13.00 per share. Moreover, it has a Zacks #2 Rank, implying a short-term Buy rating on the stock.

Dean Foods is a leading processor and distributor of milk and other dairy products in the U.S. as well as a leading manufacturer of various specialty food products. The company operates primarily on a local basis, competing mostly with local and regional operators.

Despite increased commodity costs and operating expenses, Dean Foods reported better-than-expected fourth-quarter 2011 results. Adjusted earnings per share jumped 80% to 27 cents, beating the Zacks Consensus Estimate of 23 cents, primarily driven by a 4.5% growth in its top line.

Bolstered by better-than-expected quarterly results, the company estimates first quarter 2012 earnings per share in the range of 18 cents to 23 cents. Moreover, the company forecasts full-year 2012 adjusted earnings in the range of 87 cents to 95 cents a share, an increase of 13% - 24% from fiscal 2011.

Dean Foods is taking prudent steps to muddle through the declining fluid milk processing profits as a result of increased money-offs on private label milk distribution and weak sales volume. These include price realization by passing input cost inflation to customers, cost reduction initiatives and increasing volume performance. These fundamental steps will facilitate in stemming the decline while rebuilding the company’s profitability.

Moreover, Dean Foods continues to make headway in its efforts to achieve the lowest cost position in the industry. The company has benefited from its continued focus on cost reduction initiatives across the businesses including headcount reductions.

The company has already achieved its targeted total cost savings of $300 million in fiscal 2011 under the cost reduction program started in 2009. Further, Dean Foods intends to move aggressively toward streamlining its cost structure.

Dean Foods has also taken strategic steps to optimize its capital allocation and concentrate on core business activities. Consequently, during fiscal 2011, the company divested its underperforming business unit operations of a dairy processing facility in the Southeast and expects more closures in the near future.

However, Dean Foods’ business is heavily dependent on commodities such as raw milk, soybeans, fuel and other. The company’s performance may be adversely affected due to volatility in the prices of these commodities, which are based on market conditions and governmental regulations.

In addition, Dean Foods is heavily dependent on a handful of customers, including large discounters, supermarkets and warehouse clubs. This considerably reduces the company’s pricing power against these giant retailers, thereby exerting pressure on margins and limiting profitability.

Above all, in the recent years, the retail grocery industry has experienced significant consolidation, and as a result, competition has intensified among dairy product suppliers. Dean Foods experiences stiff competition, especially at the processing level, in all major product lines and geographic markets.

Therefore, the company could suffer significantly from the loss of any large regional grocery chain. Dean Foods competes not only with various dairy processors for shelf space, but also with various beverages and nutritional products. The company’s major competitors include Kraft Foods Inc. ( ) and ConAgra Foods Inc. ( CAG - Analyst Report ) .