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Can Dean Foods' (DF) Growth Plans Help It Sustain Momentum?

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The dairy products giant Dean Foods Company’s stock price has been heading north, on the back of its impressive growth strategies and brand strength. Notably, shares of this Dallas-based company have outperformed the broader Consumer Staples sector in the last six months with a return of 16.8%, as compared with just 2.8% growth for the sector.  



Dean Foods’ brand strength has enabled the company to enjoy a market leading position in the food and beverage industry. Dean Foods’ robust portfolio not only provides it a competitive advantage but also complements its customer base. Further, through its brands, the company leverages the national scale of its distribution network.

Moving on to the company’s growth efforts, Dean Foods has taken strategic steps to optimize its capital allocation and concentrate on core business activities. As part of this strategy, the company is looking to diversify its portfolio of brands moving beyond the pure milk products. While the company is on track with the growth of its core dairy-related business, with products like ice cream, flavored milk and sour cream, it is also vouching for opportunities in juices, teas and other beverages.

In recent years, the company’s pace of boosting growth at the core dairy business was anchored by the introduction of DairyPure milk brand in 2015 and TruMoo flavored milk in 2012. In 2016, the company explored the ice cream business with the acquisition of Friendly’s Ice Cream manufacturing and retail operations in June, and the organic milk space with the addition of the Organic Valley milk brand through a 50/50 joint venture with CROPP in November.

Well, the integration of Friendly’s into Dean Foods’ dairy brand portfolio is already complete and the business is producing solid results. Evidently, in fourth-quarter 2016, ice cream volumes gained 13%, mainly backed by Friendly’s contributions.

However, the overall fourth-quarter 2016 results were disappointing, as the company posted lower-than-expected earnings per share, while sales declined marginally but met our estimates. Results were affected by fall in volumes and a sequential increase in raw milk costs. This highlights Dean Foods’ vulnerability to fluctuating raw material prices, as the company is heavily dependent on commodities such as raw milk, soybeans, diesel fuel and others, the prices of which often fluctuate.

Evidently, while raw milk costs declined 2% year over year in fourth-quarter 2016, it rose 6% from the third quarter. Moreover, the Class I Mover, which is a measure of raw milk expenses, fell 9% year over year to $14.80 per hundred-weight in full-year 2016. Further, the company is not very optimistic about the milk markets in 2017 as it projects dairy commodity inflation of nearly 15–20% for 2017 and about 20% in the first quarter.

Moreover, it expects volumes to dip 1% in the first quarter, leading to a dull earnings outlook for the quarter. This, in turn, has pushed the Zacks Consensus Estimate significantly down to 17 cents, from 41 cents, over the last 60 days.

Dean Foods Company Price and Consensus
 

Dean Foods Company Price and Consensus | Dean Foods Company Quote

Nevertheless, Dean Foods looks to be an inspired choice for value investors. Flaunting a Value Style Score of ‘A’, the company has a trailing 12 months PE ratio of 12.01, which is considerably lower than the Consumer Staples sector’s multiple of 24.85. Also, it compares pretty favorably with the market at large, as the PE for the S&P 500 is of about 20.18. These factors, along with the fact that Dean Foods’ current multiple is below the highs scaled in the last one year, signal an entry scope for value investors.

Zacks Rank and Key Picks

Dean Foods currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the Consumer Staples sector include Conagra Brands, Inc. (CAG - Free Report) , Pinnacle Foods Inc. and Post Holdings, Inc. (POST - Free Report) , with a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Conagra Brands boasts a solid earnings surprise history and has a long-term growth rate of 8%.

Pinnacle Foods, with long-term earnings per share growth rate of 8.3% has an average positive earnings surprise of 1.7% in the trailing four quarters.

Post Holdings, with long-term earnings per share growth rate of 5%, boasts a solid earnings surprise history.

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