On Tuesday, dairy giant Dean Foods (NYSE:DF) reported 2011 first quarter earnings of 14 cents per share versus 23 cents a year ago. But despite the quarter-over-quarter decline, Dean's earning's blew away past analysts estimates of 6 cents. Net sales for the first quarter totaled $3.05 billion, compared to $2.96 billion of net sales in the first quarter of 2010. Analyst were looking for revenues of $3.07 billion. Here we dig into Dean's earnings report. (For related reading, see Food Stocks To Avoid In 2011.)

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A Strong Showing for Dean Foods
Dean is the largest supplier of private-label milk in the U.S. The company also owns the Horizon Organic Dairy Brand in addition to other well-known dairy brands like Land O'Lakes. Rising commodity costs have been a big issue for Dean, so the first-quarter results came as a shock to most. Even management was pleased with the company's better-than-anticipated developments during the first quarter. Dean also provided 2011 second-quarter guidance of 15-20 cents per share and full-year EPS guidance of 67-75 cents per share. Both estimates were above consensus estimates. It's no surprise that shares advanced nearly 15% on the news.

Challenges Ahead
Nonetheless, challenges remain ahead for Dean. Although the year has started out strong, things could take an unpleasant turn going forward. Commodity markets are very volatile right now. Even the global consumer and food brands like Kraft (NYSE:KFT) and Procter & Gamble (NYSE:PG) have not been able to escape rising input costs. It's only due to price increases that Kraft has been able to sustain its growth thus far in 2011. With consumers still on edge and inflation already here, it's a delicate environment for players like Dean Foods.






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Dean boasts a market cap of $2.3 billion and net debt of nearly $4 billion. However, the company generates more than $11 billion in annual sales. Any incremental improvement in margins on that sales base has a very levered effect on earnings growth. Milk is a consumer staple so sales are stable, but margins are low in this business. Grocer Winn-Dixie (Nasdaq:WINN) also affords a similar opportunity although the balance sheet is pristine in this case. Winn-Dixie has a market cap of $400 million, no net debt and annual sales exceeding $7 billion. But again, the business operates on razor thin margins.

Bottom Line
In light of the current commodity pricing environment, Dean Foods is off to a solid 2011. If the rest of the year follows the first quarter, this may not be the only time the company exceeds expectations this year.

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Tickers in this Article: DF, WINN, KFT, PG

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