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Dean Foods' Profit Beats Estimates

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Dean Foods Company (DF - Free Report) reported adjusted earnings of 33 cents per share for the third quarter of fiscal 2012, substantially beating the Zacks Consensus Estimate of 28 cents a share. The company’s quarterly earnings increased approximately 83% compared with the year-ago earnings of 18 cents per share. On a reported basis, including one-time items, the company registered earnings of 20 cents per share.

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

Recently, one of Dean Foods’ peers, Kraft Foods Group Inc. also reported a robust third quarter of fiscal 2012. The company reported adjusted earnings per share (excluding asset impairment and exit costs) of 85 cents, way ahead of the Zacks Consensus Estimate of 68 cents. Earnings jumped 21% from the prior-year quarter’s adjusted figure on the back of innovation, productivity improvements, volume growth and increased marketing investments.

Quarter in Detail

Dean Foods’ net sales dipped 7.8% year over year to $3.143 billion compared with net sales of $3.411 billion in the comparable prior-year quarter. The decline was primarily due to the passing of benefit related to lower dairy commodity costs at Fresh Dairy Direct and Morningstar to consumers, partially offset by strong top-line performance at WhiteWave-Alpro. The company’s quarterly net sales also missed the Zacks Consensus Estimate of $3.291 billion.

Segment-wise, during the reported quarter, Dean Foods’ Fresh Dairy Direct sales declined 13% to $2.2 billion, while WhiteWave-Alpro’s sales climbed 13% to $598 million. The top-line results at the company’s Morningstar segment came in at $338 million, dipping 3% from the year-ago quarter as the benefit from lower dairy commodity costs was passed to the consumers.

Adjusted operating income for the third quarter surged 35% to $145.3 million from the prior-year quarter’s $107.9 million. The improved results resulted in an increase in operating income by 25%, 32% and 54% at WhiteWave-Alpro, Fresh Dairy Direct and Morningstar, respectively. 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 146 basis points to 4.62% compared with 3.16% in the comparable prior-year quarter.

The company ended the quarter with cash and cash equivalents of $69.8 million, long-term debt of $3.451 billion and shareholders’ equity of $50.6 million. During the nine-month period, the company generated $354 million of cash from operations, while free cash flow totaled $191 million. Capital expenditures for the nine month period decreased to $163 million compared with $215 million in the year-ago period.

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 3.71x, lower than its maximum leverage covenant ratio of 5.50x which suggest that the company has now more financial flexibility to service its debt.


For the rest of 2012, Dean Foods expects the momentum of the first half of the fiscal year to continue across all its business segments. The company also anticipates the WhiteWave segment to deliver strong volume-driven sales and operating leverage.

Further, the company expects the Fresh Dairy Direct business to deliver operating income growth in the high-teens to 20% range for the full year.

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 in the fourth quarter are expected to be in the range of 27–32 cents per share.

On the basis of the above assumptions, the company raised its earnings guidance for fiscal 2012 to $1.27–$1.32 per share from the previously guided range of $1.18–$1.28.

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 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.

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 #3 Rank, implying a short-term Hold rating. Moreover, we are maintaining a long-term Neutral recommendation on the stock.

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