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Bear of the Day: Dean Foods Company (DF)

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Dean Foods Company (DF - Free Report) has seen its stock price tumble 18% since it reported its fourth quarter and fiscal 2018 financial results in late February. Shares of DF are down 16% on the year, compared to the Food Market’s 9% climb and the S&P 500’s 12% jump. Looking ahead, the company’s growth appears rough, with the overall dairy industry’s future seemingly headed in the wrong direction.  

Overview

Dean Foods is one of the largest processors and direct-to-store distributors of fresh fluid milk and other dairy products, such as butter and ice cream. The company’s portfolio includes DairyPure, TruMoo, Land O’ Lakes, Country Fresh, Dean’s, and many others. Despite the diversity, the Dallas, Texas-headquartered firm faces a possible crossroads, as do other dairy producers, due to the rise of alternative “milk” offerings such as oat, nut, and soy, along with other non-dairy options for ice cream and more.

The Dairy Farmers of America released a report on March 20 that showed a $1.1 billion drop in net sales in 2018. The firm said that the 7.5% decline in sales was primarily due to lower milk prices. Aside from the price-based concerns, the global dairy alternatives market is projected to soar from $11.9 billion in 2017 to $34 billion by 2024.

Along with the overall industry headwinds and uncertainty, Dean Foods posted a full-year fiscal 2018 adjusted net loss of $0.47 per share. Worse yet, the firm suspended its quarterly dividend to “enhance financial flexibility.” This announcement alone is likely what sent shares of DF down huge following its Q4 earnings release because even lowering a dividend often means bad things are coming—suspension is a whole different animal.

The chart below shows DF’s freefall over the last roughly 15 years. Shares of DF have tumbled from $8.42 per share on March 28, 2018 to as low as $2.73 a share over the last 12 months. DF stock closed regular trading Thursday at $3.17 a share.

 

 

Outlook

Dean Foods has sold off brands in recent years to become leaner. Yet, its core business might face more competition from store-branded options than ever before. The likes of Walmart (WMT - Free Report) and Kroger (KR - Free Report) sell their own milk and other dairy products. Amazon (AMZN - Free Report) even started to sell milk online under its Happy Belly brand.

Clearly, there do not seem to be many obvious positives for the company in the near-term. With that said, one possible silver lining for DF investors could be an acquisition. The likelihood of another company coming in and buying Dean Foods could become more likely if its stock price continues to dive.

The hope then would be that a firm commits to buying Dean Foods at a slight premium. And a sale is not purely speculation after DF’s chief executive said the magic “strategic alternatives” phrase. “As we seek to accelerate our business transformation and enhance shareholder value, the Board has initiated a review of a range of potential strategic alternatives to best position the Company for the future,” Dean CEO Ralph Scozzafava said in prepared remarks last quarter.

Speculation aside, the company is projected to see its Q1 fiscal 2019 revenue fall 4.15% to $1.90 billion. The company’s full-year revenue is expected to pop 0.42%. But Dean Foods’ 2020 sales are expected to fall 1.40% below our current year estimate to hit $7.68 billion. This also would mark a downturn from fiscal 2018’s $7.76 billion full-year revenue.

 

 

Earnings Trends

At the bottom end of the income statement, DF’s adjusted first-quarter earnings are projected to tumble 221% from $0.14 per share in the year-ago period to a loss of $0.17 a share. The company’s full-year 2019 EPS figure is projected to climb 17% from last year’s $0.47 per share loss, to a loss of $0.39 a share. Investors will also notice how much more negative Dean Foods’ earnings outlook has become recently, as analysts turn more bearish.

 

 

Bottom Line

Dean Foods is currently a Zacks Rank #5 (Strong Sell) due, in large part, to its recent wave of negative earnings revision activity, particularly for fiscal 2019 and 2020. DF stock has also shown very few signs of life for an extended period of time and the dairy industry could be headed for an even bigger slowdown.

The Zacks Rank does not currently hold any other companies that rest in the Food – Dairy Product industry in high regard. Therefore, investors still interested in the larger food market might instead turn to General Mills (GIS - Free Report) , Associated British Foods PLC (ASBFY - Free Report) , and United Natural Foods, Inc. (UNFI - Free Report) , which are all either Zacks Rank #1 (Strong Buy) or #2 (Buy) stocks at the moment.

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