Dean Foods (DF) Shares Slump on Higher Costs, Low Volumes

Dean Foods Company DF has been in the red of late owing to a dismal earnings history. Shares of this Zacks Rank #4 (Sell) stock fell 6.9% in the last three months, underperforming the Zacks categorized Consumer Staples sector’s gain of 3.3%.

 

Let’s now look deeper into the factors that have been holding down the performance of this processor and distributor of milk, dairy products and other specialty food products in the U.S.

Factors Impacting Performance

The company’s dismal stock performance can be attributed to its lower-than-expected bottom line performance. Notably, the company has reported negative earnings surprise in three of the trailing four quarters, with an average of 8.4%.

The first-quarter fiscal 2017 marked the company’s second consecutive earnings miss. Further, earnings dipped year over year mainly due to a rise in raw milk costs and lower milk volumes.

The company witnessed escalated raw milk costs in the first quarter of 2017 on a year-over-year and sequential basis. During the same quarter, raw milk costs rose about 6% from fourth-quarter 2016 and jumped 18% from first-quarter 2016.

The USDA data through February 2017 revealed that fluid milk volumes dipped 1.8% year over year, on an adjusted basis. Also, total volumes of 633 million gallons dipped 1.3% from 641 million gallons in the prior-year quarter. The Class I Mover, a measure of raw milk expenses, increased year over year in the second quarter.

Apart from this, the company is facing severe competition from other dairy products suppliers due consolidations in the retail grocery industry.

Positive Side of the Coin

However, the company posted top line growth in the fiscal first-quarter driven by contributions from Friendly’s, which drove ice cream sales volumes. We applaud the company’s efforts to expand its dairy business, evident from its recent deals with Good Karma and Organic Valley milk brands. Further, the company's focus on its cost productivity and growth plans bode well.

Bottom Line

Although the company has been trying to improve performance and develop a competitive edge by expanding its product portfolio, which are yet to reflect in the company’s performance. Hence, we would suggest investors to stay away from the stock at the moment..

Key Picks

Investors may consider other better-ranked stocks in the same sector, such as Constellation Brands, Inc. STZ, MGP Ingredients, Inc. MGPI and Aramark ARMK, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Constellation Brands has an average positive earnings surprise of 7.7% over the trailing four quarters and a long-term earnings growth rate of 17.8%.

MGP Ingredients has an average positive earnings surprise of 27% over the trailing four quarters and a long-term earnings growth rate of 15%.

Aramark has an average positive earnings surprise of 4.5% over the trailing four quarters and a long-term earnings growth rate of 12%. 

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