Dean Foods Company (DF) has watched all 11 estimates for this year move higher in the past month after releasing robust first-quarter 2012 results, which included year-over-year EPS growth of 121.4% and a positive surprise of 47.6%.
Shares reached a new 52-week high of $15.70 on May 31, before closing at $15.64, and are up 43.5% year to date.
The leading processor and distributor of milk became a Zacks #1 Rank (Strong Buy) on May 12, just three days after its earnings announcement.
Fabulous First Quarter
Dean Foods Company posted first-quarter 2012 earnings of 31 cents per share on May 9, beating the Zacks Consensus Estimate of 21 cents and increasing substantially from 14 cents in the prior-year quarter. Healthy sales in the WhiteWave-Alpro segment and cost containment efforts benefited the quarter.
Net sales of $3.2 billion comfortably surpassed the Zacks Consensus Estimate of $3.1 billion, and grew 5.4% year over year, mirroring sales increases across WhiteWave-Alpro (up 13%), Morningstar (up 5%) and Fresh Dairy Direct (up 4%). Operating income surged 42.2% to $151.8 million, whereas operating margin expanded 120 basis points to 4.7%.
The better-than-expected results prompted management to raise its 2012 earnings per share guidance to the range of $1.10 to $1.20 from 87 cents to 95 cents projected earlier. For the second quarter, earnings are projected between 28 cents and 33 cents per share.
The company has taken initiatives to restructure operations in an effort to reduce costs while expanding its branded product business through acquisitions. Moreover, in a move to optimize its capital allocation and concentrate on core business activities, Dean Foods intends to exit underperforming businesses.
Estimates Flying High
In the past 30 days, the Zacks Consensus Estimate for 2012 rose 28% to $1.19 per share on the back of upward revisions in all 11 estimates, which reflects year-over-year growth of 54.5%.
For 2013, the Zacks Consensus Estimate is $1.33 per share, reflecting an increase of 19.8% in the last 30 days, aided by 10 upward revisions out of 11 total estimates. This suggests a year-over-year growth of nearly 11.8%.
Valuation Stretched, Yet Lucrative
Dean Foods Company currently trades at a forward P/E of 13.1x, reflecting a 42.7% premium to the peer group average of 9.2x. Also, on a price-to-book basis, shares trade at 8.7x, compared with the peer group average of 0.5x. Given the company's compelling fundamentals, the premium valuation is justified and well supported by its long-term estimated EPS growth rate of 10%.
With respect to return on equity (:ROE), the stock looks very attractive. It has a 12-month ROE of 52.3%, which is substantially above its peer group average of 5.7%. This implies that the company reinvests its earnings more efficiently than its peer group.
Shares of Dean Foods Company have been trading in the range of $10.90 to $12.72 between January 3 and May 8, 2012. It broke that range on May 9 and started inching closer to its 52-week high. Moreover, the stock is currently trading above the 50 and 200-day moving averages, which stand at $13.25 and $11.69, respectively. In fact, the stock has been consistently trading above its 200-day moving average since December 15, 2011. Also, it has remained above the 50-day moving average since April 27, 2012.
Volume is fairly strong, averaging roughly 2,849K daily. Dean Foods, which competes with Kraft Foods Inc. (MDLZ), has outperformed the S&P 500 since February 15, 2012. The year-to-date return for the stock is 43.5% compared with the S&P 500's return of 4.2%.
Founded in 1925 and headquartered in Dallas, Texas, Dean Foods Company is a leading processor and distributor of milk and other dairy products in the U.S. as well as a leading manufacturer of various specialty food products. The company reports through three operating segments: Fresh Dairy Direct, WhiteWave-Alpro, and Morningstar. The company has a current market cap of $2.89 billion.
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