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Dean Foods (DF) Hits 52-Week Low, Milk Costs Hurt Growth


Dean Foods Company DF hit a 52-week low of $14.80 on Jul 14, closing at $15.03. Despite the company’s efforts to diversify the brand and its sustained focus on improving operations, performance remains challenged by rising competition and escalated raw milk costs. The impact is well reflected in Dean Foods’ share price which has been underperforming the broader Zacks categorized Consumer Staples sector for the last six months. In the said time frame, share price of the company has declined 28.2% against the sector’s growth of 9%.

Let’s now delve deeper into some of the factors that have been pulling down Dean Foods and the strategic measures put in place to revive its performance.

Milk Cost & Volumes Posing Concerns

Dean Foods’ business is heavily dependent on commodities such as raw milk, soybeans, diesel and others. The prices of these commodities are continuously fluctuating. A price hike in such items will hurt the company’s margins. The company witnessed escalated raw milk costs in the first quarter of 2017, both on a year-over-year and sequential basis. During the quarter, raw milk costs rose about 6% from fourth-quarter 2016 and jumped 18% from first-quarter 2016.

The USDA data through Feb 2017 revealed that fluid milk volumes dipped 1.8% year over year on an adjusted basis. Also, total volume of 633 million gallons dipped 1.3% from 641 million gallons in the prior-year quarter. Additionally, the Class I Mover, a measure of raw milk expenses, increased year over year in the second quarter. This raises concerns over the company’s near-term performance.

The impact of decreased volumes and increased raw milk costs led Dean Foods to post dismal first-quarter 2017 results, wherein earnings marked its second consecutive miss and plunged year over year.. The company’s earnings underperformed the Zacks Consensus Estimate by an average of 8.4% in the trailing four quarters.

Consolidation Intensifies Competition

In recent years, the retail grocery industry experienced significant consolidation, resulting in intense competition among dairy product suppliers. Dean Foods experiences stiff competition, both geographically and at the processor level, in all major product lines. The company could suffer significantly from the loss of any large regional grocery chain. It not only competes with various dairy processors for shelf space but also with various beverages and nutritional products.

Strategic Initiatives Lift Hopes of Improvement

Contributions from Friendly’s acquisition have been boosting ice cream sales volumes. This is aiding top-line growth. We also applaud the company’s efforts to grow in the organic space, which is evident from its recent deals with Good Karma and Organic Valley as well as the acquisition of Uncle Matt's juices. Further, the company's focus on cost productivity and growth plans bode well. With such strategic initiatives in place, we can hope that Dean Foods would be able to uplift its performance. Moreover, the company carries a VGM Score of “A”, which points at its inherent strength.

While estimates for the second quarter have been stable, fiscal year estimates have witnessed a downtrend. Dean Foods currently carries a Zacks Rank #3 (Hold).

Still Interested in Consumer Staples Stocks? Check these

Some better-ranked stocks in the same sector include Energizer Holdings, Inc. ENR, sporting a Zacks Rank #1 (Strong Buy) and Constellation Brands, Inc. STZ and Newell Brands Inc. NWL, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Energizer Holdings delivered an average positive earnings surprise of 21.6% over the trailing four quarters and has a long-term earnings growth rate of 10.1%.

Constellation Brands came up with an average positive earnings surprise of 11.7% for the past four quarters and has a long-term earnings growth rate of 18.2%.

Newell Brands delivered an average positive earnings surprise of 7.7% over the trailing four quarters and has a long-term earnings growth rate of 12.1%.

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