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Dean Foods Company (DF - Analyst Report) reported adjusted earnings of 40 cents per share for the fourth quarter of fiscal 2012, substantially beating the Zacks Consensus Estimate of 30 cents a share. The company’s quarterly earnings increased approximately 48% compared with the year-ago earnings of 27 cents per share. On a reported basis, including one-time items, the company registered earnings of 20 cents per share.

The company’s robust fourth-quarter results reflect continued growth momentum across its business segments as well as intense focus on cost control and better pricing.

Quarter in Detail

Dean Foods’ adjusted net sales increased 3.7% year over year to $3,417.8 million compared with net sales of $3,296.0 million in the comparable prior-year quarter. The increase was primarily due to the passing of higher dairy commodity costs at Fresh Dairy Direct to customers and strong top-line performance at WhiteWave. The company’s quarterly net sales also swept past the Zacks Consensus Estimate of $3,377.0 million.

Adjusted operating income for the quarter surged 16% to $157.0 million from the prior-year quarter’s $135.0 million. The improvement was an outcome of disciplined expense control on all fronts throughout the organization.

Consequently, Dean Foods’ adjusted operating margin for the quarter expanded 50 basis points to 4.59% compared with 4.09% in the comparable prior-year quarter.

The company ended the fiscal with cash and cash equivalents of $79.0 million, long-term debt of $3,102.8 million and shareholders’ equity of $466.9 million. During the fiscal, the company generated $384.0 million of cash from operations, while free cash flow totaled $156.0 million. Capital expenditures for the twelve month period decreased to $254.0 million compared with $326.0 million in fiscal 2011.

Further, the company remains focused on curtailing its overall leverage. As of the end of the third quarter, the company's funded debt to EBITDA ratio, as defined by its credit agreements, was 3.54x, lower than its maximum leverage covenant ratio of 5.50x, which suggests that the company now has more financial flexibility to service its debt.

Outlook

Dean Foods expects the momentum to continue across all its business segments in fiscal 2013. The company anticipates operating income to grow in the low-to-mid single digit range versus the rebased fiscal 2012 operating income of $257.0 million.

In a nutshell, in addition to being hopeful about such performances at the segments, the company is focusing on efficiency and leverage reduction to drive both operating income and earnings per share. Adjusted earnings (excluding WhiteWave’s operating results) in the first quarter of fiscal 2013 are expected to be in the range of 22–27 cents per share.

For fiscal 2013, the company is anticipating adjusted earnings in between $1.00 and $1.10 per share.

Our Recommendation

We believe that Dean Foods has taken strategic steps to optimize its capital allocation and concentrate more on core businesses. The recent IPO of its subsidiary has provided Dean Foods access to capital for funding growth, enhance its liquidity position, maximize its value and improve debt finance.

Moreover, Dean Foods continues to make headway with 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.

On the flip side, in recent years, the consolidation of the retail grocery industry has led to increased competition among dairy product suppliers. In such a situation, Dean Foods faces stiff competition at the processor level, in all major product lines and geographic markets. Dean Foods currently has a Zacks Rank #3 (Hold).

Other Stocks Worth Considering

Besides Dean Foods, other stocks in the food category business that are expected to perform well include:

J&J Snack Foods Corporation’s (JJSF - Snapshot Report) Earnings ESP stands at +5.00% and it carries a Zacks Rank #1 (Strong Buy).

Kellogg Company (K - Analyst Report) has an Earnings ESP of +0.97% and a Zacks Rank #2 (Buy).

Adecoagro S.A. (AGRO - Snapshot Report) with an Earnings ESP of +71.43%, holds a Zacks Rank #3 (Hold).

Our proven model shows that a company may beat the earnings if it has the right combination of two key components – Positive Earnings ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1, #2 and #3.

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