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Here's Why Dean Foods Appears Unappetizing Since Q4 Results

Zacks Equity Research

Dean Foods Company DF appears to be in jeopardy, after the company released fourth-quarter 2018 results on Feb 27. The company continued to be plagued by soft volumes and cost inflation. Also, management suspended the financial outlook, as it is focused on speeding up the company’s transformation plan and exploring other strategic options, simultaneously.

Well, the company’s shares have crashed as much as 40.5% since the quarterly release. Moreover, this diary products company has plummeted 62.3% in the past six months, wider than the industry’s decline of 57.4%. So, let’s take a closer look at the factors pulling Dean Foods down.

Factors Denting Dean Foods

The company has been reporting year-over-year decline in the bottom line for the trailing three quarters. In the fourth quarter, adjusted loss of 50 cents per share was wider than the Zacks Consensus Estimate of a loss of 27 cents. Also, the bottom line compared unfavorably with earnings of 25 cents in the year-ago quarter. Performance in the last reported quarter was hurt by a number of industry challenges. Persistent decline in fluid milk consumption, and higher fuel, resin, transitory and freight costs were some of the deterrents that impacted results. A tight labor market added to the woes.

In fact, Dean Foods has been grappling with lower volumes and loss of share in U.S. fluid milk volumes for a while now. During the fourth quarter, volumes declined significantly year over year, due to major customer exits and overall category softness. Per the USDA results, fluid milk category dropped 2.1% through December on a quarter-to-date basis. Also, soft volumes and escalated transitory costs dented Dean Foods’ adjusted gross profit and bottom line. Persistence of such trends is a concern.

Talking of cost inflation, escalated fuel, freight and resin costs as well as volatility surrounding fluid milk volumes negatively impacted the company’s margins in the last reported quarter. Also, a tight labor market due to limited driver availability impacted margins. These factors along with higher transitory costs related to plant closures and increased advertising expenses weighed on results.

Additionally, during the fourth quarter, the company’s raw milk prices went up 6% sequentially. Management anticipates Class I raw milk cost inflation of roughly 8% in the first quarter of 2019, while it expects dairy commodity inflation for the full year. We believe that adverse fluctuations in raw-material prices pose threats to Dean Foods’ operating results.

We believe that these aspects and stiff competition have hurt analysts’ confidence in Dean Foods, as it has been witnessing a downtrend in the Zacks Consensus Estimate. Notably, the first quarter and 2019 consensus marks have deteriorated from a loss of 6 cents to a loss of 17 cents, and from a loss of 5 cents to a loss of 39 cents, respectively, in the past sixty days.

Clearly, these factors have made investors extremely cautious about this Zacks Rank #5 (Strong Sell) stock. Although management is committed toward productivity and cost-reduction initiatives, these efforts may not be able to completely offset hurdles stemming from the rising costs scenario.

Don’t Miss These Solid Food Stocks

MEDIFAST MED, with long-term EPS growth rate of 20%, sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

General Mills GIS, with a Zacks Rank #2 (Buy), has long-term earnings per share growth rate of 7.5%.

Sysco Corporation SYY, with long-term earnings per share growth rate of 10.3%, carries a Zacks Rank #2.

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