Dean Foods Stays Neutral - Analyst Blog
September 16 2011 - 1:12PM
Zacks
We currently maintain a long-term Neutral recommendation on
Dean Foods Co. (DF). The 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.
To counter the ill effects of declining milk processing profits
from increased money-offs on private label items and weak sales
volume, Dean Foods is taking prudent steps, such as price
realization through passing input cost inflation to customers, cost
reduction initiatives and increasing volume performance. These
fundamental steps will facilitate in stemming the rot and
rebuilding the company's profitability.
Moreover, Dean Foods continues to make headway in its efforts to
achieve the lowest cost position in the industry. Management has
already reduced headcounts by 600 positions across all areas of
businesses, which have led to a significant amount of cost savings
in the current fiscal.
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.
Further, Dean Foods has taken strategic steps to optimize its
capital allocation and concentrate on core business activities.
Consequently, during current fiscal 2011, the company has divested
its underperforming business unit operations of dairy processing
facility in the Southeast and expects more closures over the
balance of the year.
Besides, 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 have increased rapidly due to
growing awareness among consumers about the health benefits of soy
and organic foods. The acquisition of Alpro has provided a
significant opportunity to the company for expanding into the new
markets across the European Union.
However, Dean Foods has recently divested its milk processing
and related businesses situated in Waukesha, Wisconsin, which 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 antitrust
dispute settlement agreement between the company and the U.S.
Department of Justice (DOJ) and the states of Wisconsin, Illinois
and Michigan.
Further, Dean Foods' business is heavily dependent on
commodities, such as raw milk, soybeans, diesel fuel and other. The
performance of the company may be adversely affected due to
volatility in the prices of these commodities, as the prices are
based on market conditions and governmental regulations.
Above all, in the 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.
Dean Foods competes not only with various dairy processors for
shelf space, but also with various beverages and nutritional
products. The company’s major competitors include Kraft
Foods Inc. (KFT) and ConAgra Foods Inc.
(CAG).
Dean Foods currently has a Zacks #3 Rank, implying a short-term
Hold rating on the stock.
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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