Why Dean Foods' Performance Could Improve Going Forward

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Mar 31, 2015
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2014 wasn’t favourable for Dean Foods (DF, Financial). The softness in the milk market had a huge impact on its performance in fiscal 2014. Also, increased raw milk price had bearing on its results for 2014. However, Dean Foods is expected to make a comeback. It is seeing improvements in the milk market dynamics. It started witnessing favourable progress in the raw milk material prices that should assist the company to deliver a turnaround in fiscal 2015.

A look at the prospects

The raw milk prices in fiscal 2015 are forecasted to decline. The average Class I Mover that denotes a measure of raw milk costs has improved $3.95 per hundred-weight to $18.58 per hundred-weight from $23.59 per hundred-weight in the fourth-quarter 2014. This is a significant improvement of 21% in first-quarter January 2015. In addition, the company observed further decrease of $2.34 to raw milk costs to $16.24 per hundred-weight in February 2015. Hence, its overall raw milk costs have improved approximately 31% as compared to the highest point in raw milk cots in 2014.

Looking ahead, the company anticipates another decline in Class I Mover in March. It expects the raw milk costs to average approximately $16.84 per hundred-weight in the first-quarter 2015. This demonstrates a 29% decline in raw milk costs sequentially and about 25% decline in year-on-year basis.

Apart from this favourable fluid milk price declines, the company is experiencing solid growth in global milk production with positive feed costs. Dean Food expects solid global supply growth in the short-run. Also, it is realizing significant growth of 4% in the food service channel. This improvement is driven by the increased production of milk by dairy farmers in the U.S. and other milk-producing areas. In addition, sanctions imposed on Russia and China against import of dairy products from the U.S. and Europe will further enhance supply. These consequent changes should curb the rising prices of raw milk.

A strong portfolio

Dean Food has strong branded and private white milk product portfolio. It has seen improvement in price in both branded and privately labelled white milk products at retail. Moreover, it has a competitive advantage of productive portfolio of brands that should gain more market share for the company going forward. It is seeing growth for its national brands such as TruMoo and MULO ACV.

Further, the company plans to grow these brands with innovative extension into new categories like new on-trend TruMoo protein plus products. Also, the company remains on track to invest in this brand with new consumer advertising, new flavour offerings and exciting promotions on seasonal windows. This should open up a new extension line for the brand and drive its growth in the future.

Dean Food will do better this fiscal year with declining raw milk costs as it has best in class refrigerated direct store delivery system with its widespread national scale of network . DF plans to enhance its direct store delivery system or DSD facility with a new warehouse and extended shelf life capabilities. These extended shelf life capabilities should drive growth for its national brands going forward.

The continuous decline in Class I Mover along with strong growth in global dairy production should become additional tailwinds for the company in fiscal 2015. Also, the investment in the national brands and its branded and privately held white milk product portfolio should drive its top and bottom line performance in 2015.

Moreover, Dean Foods is strategically engaged in network optimization. It has shut down nearly 12 plants over last 18 month duration. Also, it has recently announced that it would close another plant in the first-quarter 2015. It remains on track to return to more historical level of network optimization. Dean Food through these costs saving initiatives has reduced excess capacity in its network, which is driving its efficiency driven by asset realization.

Dean Foods expects these costs saving initiatives and efficiency gains from the plant closures to counterbalance the volume de-leverage in its plant and inflation in its business. Also, the company sees potential opportunity with its plant logistics assets that should reduce its structural costs as well.

Conclusion

Dean Food should benefit from the positive atmosphere in the milk market. The company is expected to post earnings of $0.05 per share to $0.15 per share in the first-quarter of 2015. Also, it remains solid to improve its financials this year over 2014. The analysts expect its earnings to grow at CAGR of 14.30%, which is greater than industry average CAGR of 13.18% for the next five years. This indicates tremendous growth for the stock in the long-run.