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Dean Foods Goes Sour
Dean Foods Co. (NYSE:DF) reported third-quarter earnings sliced roughly in half, compared to last year's quarter, despite an increase in revenue. Higher dairy commodity prices and weak consumer spending hurt the milk producer and, essentially, the stock got pounded.
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Revenue Up, Profits Sliced
Revenue was $3.1 billion, compared to $2.8 billion last year's same quarter. Net income fell to $24.3 million, or 13 cents per diluted share, from $49.7 million, or 27 cents per diluted share, and 33 cents per adjusted diluted share in Q3 2009. Gregg Engles, Chairman and chief executive officer cited "adverse conditions in the conventional milk business", meaning higher dairy commodity costs.
The revenue increase largely stemmed from the pass-through of these costs, rather than sales volume growth. The WhiteWave-Alpro division, which features organic and soy milk products among others, did perform well with sales and operating income increases. These weren't enough to offset Fresh Dairy Direct Morningstar, the conventional milk business which forms the bulk of Dean Foods' milk business.
Food Business Slow
The food business has been sluggish overall recently. Sara Lee (NYSE:SLE) recently reported earnings with net income off by 32%. Campbell Soups (NYSE:CPB) just lowered its full-year 2011 guidance. It now expects sales to decline 1% in the first quarter, which will lower expected fiscal year sales growth to 1% to 3%, compared to its earlier outlook of 2% to 3%. Even Kraft Foods (NYSE:KFT), which has been holding its own through the recession, did well mainly due to the addition of its Cadbury revenue. Though Kraft is in a strong position, its net income was down. Food packager Con Agra (NYSE:CAG) also found itself with a lower year-over-year net income and EPS in its most recent quarter, and has outlook of 5% to 7% income growth for its full fiscal year. All in all, conditions are challenging for food producers of all types, from packagers to meat producers to dairy producers such as Dean Foods.
Dean Foods Outlook
CEO Engles used the words "challenged" and "pressures" when talking about Dean Foods' dairy business and the company's outlook. These words usually make investors cringe, and why not? Earnings per share are projected at 13-18 cents for the fourth quarter, which would complete a slashing roughly in half for this fiscal year compared to FY 2009's EPS. More than that, the dairy business isn't looking like, say, the soup business, as it's been suggested that the long-term trend for milk drinking may be in a decline. The argument goes that the aging U.S. population and cultural shift away from dairy may not bode well for Dean Foods; maybe, maybe not. This will be a "time will tell" factor for investors to watch.
The recession has certainly trimmed the revenue for Dean year-to-year, with the company fighting to reach pre-recession levels. How much of Dean's pricing power will be able to lift this revenue and pass along the dairy commodity inflation remains to be seen. (For related reading, see All About Inflation.)
The Bottom Line
The stock is trading at basement levels, as it recently fell beneath its 52-week low to establish a dubious new one as it was pounded after its earnings came out. The P/E is under 8, so the stock's in the basement, but is it a bargain? We'd hold off for now, though we're not ready to dump Dean Foods or the dairy biz down the drain just yet (look at the developing nations' and their dairy suppliers; somebody's drinking milk somewhere).
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IN PICTURES: How To Make Your First $1 Million
Revenue Up, Profits Sliced
Revenue was $3.1 billion, compared to $2.8 billion last year's same quarter. Net income fell to $24.3 million, or 13 cents per diluted share, from $49.7 million, or 27 cents per diluted share, and 33 cents per adjusted diluted share in Q3 2009. Gregg Engles, Chairman and chief executive officer cited "adverse conditions in the conventional milk business", meaning higher dairy commodity costs.
The revenue increase largely stemmed from the pass-through of these costs, rather than sales volume growth. The WhiteWave-Alpro division, which features organic and soy milk products among others, did perform well with sales and operating income increases. These weren't enough to offset Fresh Dairy Direct Morningstar, the conventional milk business which forms the bulk of Dean Foods' milk business.
The food business has been sluggish overall recently. Sara Lee (NYSE:SLE) recently reported earnings with net income off by 32%. Campbell Soups (NYSE:CPB) just lowered its full-year 2011 guidance. It now expects sales to decline 1% in the first quarter, which will lower expected fiscal year sales growth to 1% to 3%, compared to its earlier outlook of 2% to 3%. Even Kraft Foods (NYSE:KFT), which has been holding its own through the recession, did well mainly due to the addition of its Cadbury revenue. Though Kraft is in a strong position, its net income was down. Food packager Con Agra (NYSE:CAG) also found itself with a lower year-over-year net income and EPS in its most recent quarter, and has outlook of 5% to 7% income growth for its full fiscal year. All in all, conditions are challenging for food producers of all types, from packagers to meat producers to dairy producers such as Dean Foods.
Dean Foods Outlook
CEO Engles used the words "challenged" and "pressures" when talking about Dean Foods' dairy business and the company's outlook. These words usually make investors cringe, and why not? Earnings per share are projected at 13-18 cents for the fourth quarter, which would complete a slashing roughly in half for this fiscal year compared to FY 2009's EPS. More than that, the dairy business isn't looking like, say, the soup business, as it's been suggested that the long-term trend for milk drinking may be in a decline. The argument goes that the aging U.S. population and cultural shift away from dairy may not bode well for Dean Foods; maybe, maybe not. This will be a "time will tell" factor for investors to watch.
The recession has certainly trimmed the revenue for Dean year-to-year, with the company fighting to reach pre-recession levels. How much of Dean's pricing power will be able to lift this revenue and pass along the dairy commodity inflation remains to be seen. (For related reading, see All About Inflation.)
The Bottom Line
The stock is trading at basement levels, as it recently fell beneath its 52-week low to establish a dubious new one as it was pounded after its earnings came out. The P/E is under 8, so the stock's in the basement, but is it a bargain? We'd hold off for now, though we're not ready to dump Dean Foods or the dairy biz down the drain just yet (look at the developing nations' and their dairy suppliers; somebody's drinking milk somewhere).
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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