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Dean Foods (DF) Down on Q4 Earnings Miss, Gives 2017 View

Zacks

Dean Foods Company DF posted fourth-quarter 2016 results, wherein earnings lagged estimates and sales came almost in line. However, adjusted earnings grew year over year. Management issued a decent outlook for 2017 as its growth and productivity plans remain on schedule.

Consequently, shares of this Dallas-based food and beverage company fell 8.1% yesterday. Moreover, Dean Foods’ shares have declined 10.3% in the past one year, underperforming the Zacks categorized Food-Dairy Products industry that rose 0.3% in the same time frame.



The company’s quarterly adjusted earnings of 38 cents per share lagged the Zacks Consensus Estimate of 41 cents but rose 5.6% year over year. Further, earnings for the quarter were at the lower end of the company’s guidance range 37–45 cents per share.

On GAAP basis, the company’s earnings came in at 36 cents per share compared with 20 cents reported in the year-ago quarter.

Deeper Insight

Net sales declined 0.2% year over year to $2,018 million, and were almost in line with the Zacks Consensus Estimate of $2,017 million. The near in-line sales performance in the quarter can be attributable to the marginal 0.8% drop in total volumes of 653 million gallons from 658 million gallons in the prior-year quarter.

For the fourth quarter, raw milk costs reflected a sequential improvement but dropped from the prior-year quarter. Raw milk costs rose about 6% from third-quarter 2016 and declined 2% from fourth-quarter 2015. Further, USDA data through December revealed that fluid milk volumes dipped 1.2% year over year, on an adjusted basis. However, Dean Foods' share of U.S. fluid milk volumes jumped 10 basis points year over year.

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.

In the non-fluid milk product space, ice cream volumes gained 13%, mainly backed by contributions from the recently acquired Friendly's business. Overall, management remains pleased with the performance of its ice cream brands, despite the re-entry of popular ice cream brand, Blue Bell, in the industry.

Adjusted gross profit rose 2.4% to $497 million, while the adjusted operating income jumped 4.5% to $70 million in the fourth quarter.

Financial Position

Dean Foods ended 2016 with cash and cash equivalents of $18 million, long-term debt including current maturities of about $886.1 million, and shareholders’ equity of $610.6 million.

During 2016, the company generated nearly $257 million of net cash from operating activities and $113 million of free cash flow. The company deployed roughly $63 million as capital expenditure in the fourth quarter, bringing full-year capex to $145 million.

At the end of fourth-quarter 2016, the company's total leverage improved with net debt to bank EBITDA ratio of 1.89 times, mainly driven by solid free cash flow and improved bank EBITDA.

Outlook

Going into 2017, the company remains on schedule with its growth and productivity plans, and expects it to ramp up throughout the year. This is likely to push a major part of its earnings into the second half of 2017. That said, the company expects to deliver adjusted earnings per share in the range of $1.35–$1.55 in 2017.

For 2017, the company anticipates dairy commodity inflation of nearly 15–20%, with the highest inflationary levels estimated in the first half of 2017. Other forecasts for 2017 include capital expenditures in the range of $120–$130 million and free cash flows of $125–$150 million.

Further, the company stated that going forward it will switch to a practice of providing annual guidance alone. However, the company provided its outlook for first-quarter 2017.

The company anticipates dairy commodity inflation of nearly 20% in the first quarter. Total volumes in the first quarter are expected to decline about 1% year over year. However, the company remains confident of its strategic and brand building initiatives for future growth. Consequently, the company expects first-quarter 2017 adjusted earnings to range from 12–20 cents a share.

Dean Foods Company Price, Consensus and EPS Surprise


Dean Foods Company Price, Consensus and EPS Surprise | Dean Foods Company Quote

Zacks Rank

Dean Foods currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the consumer staples sector include ConAgra Foods Inc. CAG, Ingredion Incorporated INGR and Campbell Soup Company CPB, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ConAgra Foods’ earnings have outperformed the Zacks Consensus Estimate by an average of 13.3% in the trailing four quarters. Moreover, its long-term EPS growth rate of 8%.

Ingredion Incorporated, with a long-term EPS growth rate of 11%, has seen positive estimate revisions for fiscal 2017, in the past 30 days. The company also flaunts a solid earnings surprise history, with an average 10.3% in the trailing four quarters.

Campbell Soup has long-term EPS growth rate of 5.6%. Further, the company has seen estimates move north in the past 30 days.

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