A month has gone by since the last earnings report for Dean Foods (DF - Free Report) . Shares have lost about 12.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Dean Foods due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Dean Foods Q2 Earnings Beat Estimates, Fall Y/Y
Dean Foods reported second-quarter 2018 results. Quarterly adjusted earnings of 16 cents per share surpassed the Zacks Consensus Estimate of 14 cents, though it declined 23.8% from 21 cents in the year-ago quarter. On a GAAP basis, the company posted a loss per share of 46 cents against the earnings of 19 cents recorded in the year-ago period.
Increased private label mix, greater-than-expected fuel and resin costs, and freight cost inflation were the hurdles faced by Dean Foods during the second quarter. Further, raw milk costs came in at $14.60 per hundred-weight, which escalated 2% on a sequential basis but declined 6% year over year.
Net sales climbed 1.3% to $1,951.2 million, surpassing the Zacks Consensus Estimate of $1,940 million. Volumes in the quarter were in line with the company’s expectations. However, quarter to date, fluid milk category witnessed a dip of 1.4% through May in USDA results.
Adjusted gross profit declined almost 6% to $433 million, with adjusted gross margin contracting 170 basis points to roughly 22.2%. This was mainly attributable to soft volumes and greater mix of private-label products. Adjusted operating income decreased 27.1% to $35 million in the quarter.
Lower volumes, volatile raw milk costs and loss of shares in U.S. fluid milk volumes have long been concerns for Dean Foods.
Dean Foods ended the quarter with cash and cash equivalents of $25.4 million, long-term debt (including current portion) of approximately $857 million and shareholders’ equity of $617.5 million. Total debt outstanding, excluding cash in hand, was nearly $837 million as of Jun 30, 2018.
In first-half 2018, the company generated nearly $120.8 million of net cash from operating activities and $83 million of free cash flow from continuing operations. Capital expenditures amounted to nearly $37 million.
At the end of the second quarter, Dean Foods’ net debt to bank EBITDA total leverage ratio on an all cash-netted basis came in at 2.67 times, which remained flat with first-quarter 2018.
Management remains impressed with its performance, which continues to be driven by the company’s focus on executing commercial strategies and cost-productivity initiatives.
In fact, the cost-productivity plan helped Dean Foods generate strong cash flow and reduce adjusted general and administrative expenses by $13 million. Going ahead, the company remains focused on its strategic plan, which is likely to help it generate its targeted incremental annual run-rate savings of $150 million.
Dean Foods remains on track with its growth initiatives, though it expects to start witnessing gains from these in the fourth quarter of 2018. Also, the company is battling considerably greater-than-expected non-dairy inflation. Moreover, increased retailer investment in private label space is hurting Dean Foods’ branded product mix, which remains a threat to margins.
That said, Dean Foods lowered its adjusted earnings per share guidance. The company now envisions 2018 bottom line to range between 32 cents and 52 cents, significantly down from the previous range of 55-80 cents.
Nonetheless, the company raised its free cash flow outlook for 2018 to a range of $40-$60 million compared with the previously projected range of $30-$50 million. Capital spending is now expected in a band of $125-$150 million compared with $135-$160 million guided earlier.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -128.28% due to these changes.
Currently, Dean Foods has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Dean Foods has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.