CAG ConAgra Brands Inc

We are maintaining our long-term Neutral recommendation on Dean Foods Co. (DF).

DF 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 continues to make headway in its efforts to achieve the lowest cost position in the industry. Management’s plans to reduce headcount by 350 to 400 positions have led to approximately $25 million in annualized cost savings in 2010. The company also intends to move aggressively toward streamlining its cost structure and target total cost savings of $125 million in 2011 and $300 million over a period of three-to-five years.

Moreover, the company recently amended its Senior Secured Credit Agreement with lenders in an effort to enhance financial flexibility and improve operating performance.  The company has extended the maturity of 86% of total borrowings under Revolving Credit Facility and Term Loan A to 2014 from 2012.

Moreover, the maturity of 60% of total outstanding under Term Loan B has been extended from 2014 to 2016 or later. Also, the company has received the pending  $180.0 million from the sale of its Mountain High yogurt operations, which will be used to retire debt.

Also, the acquisition of Alpro is expected to drive sales growth of the WhiteWave–Alpro segment. Alpro is the European leader in branded soy-based beverage and food products with strong brands like Alpro soya and Provamel.

Demand for soy and organic foods has increased rapidly due to growing awareness among consumers about the health benefits. The acquisition of Alpro has provided a significant opportunity to the company to expand into the new markets across the European Union.

Furthermore, Dean Foods has taken strategic steps to optimize its capital allocation and concentrate on core business activities. Consequently, during fiscal 2010, the company divested underperforming business units, including operations of Rachel’s and Mountain High Yogurt.

On the flip side, in recent years the retail grocery industry has experienced significant consolidation and, as a result, competition has intensified among dairy product suppliers. Dean Foods experiences stiff competition, especially at the processor level, in all major product lines and geographic markets.

The company could suffer significantly from the loss of any large regional grocery chain. Dean Foods competes not only with various dairy processors for shelf space, but also with manufacturers of beverages and nutritional products. The company’s major competitors include Kraft Foods Inc. (KFT) and ConAgra Foods Inc. (CAG).

Moreover, Dean Foods’ recent decision to divest its milk processing and related businesses situated in Waukesha, Wisconsin will certainly hurt its top line as the company has more than 60% market share in the region. The divestment decision is a part of the antitrust dispute settlement agreement between the company and the U.S. Department of Justice (DOJ) and the states of Wisconsin, Illinois and Michigan.

Furthermore, Dean Foods’ business is heavily dependent on commodities such as raw milk, soybeans and diesel fuel. The performance of the company may be adversely affected by volatile prices of these key commodities.

Dean Foods’ shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

 
CONAGRA FOODS (CAG): Free Stock Analysis Report
 
DEAN FOODS CO (DF): Free Stock Analysis Report
 
KRAFT FOODS INC (KFT): Free Stock Analysis Report
 
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