Dean Foods (DF, Financial) is a dairy food products and beverages company that processes and distributes milk, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix, and other dairy products in the United States. The company also produces and distributes juices, teas, and bottled water. The dairy products company started fiscal 2015 on the right foot, after a dismal performance in 2014.
First quarter recap
The first quarter fiscal 2015 results were better than expected. The results were driven by lower milk costs and volumes and improvement in the commodity market. Shares have jumped close to 15% after the announcement of the results.
The dairy products company reported adjusted earnings of $0.24 per share from the continuing operations, easily thrashing the consensus estimates of consensus estimates of $0.17 per share, and also exceeding the top end of its guidance of $0.22 per share. This is in sharp contrast to a loss of $0.05 per share reported in the year-ago quarter.
However, on the top-line, it failed to impress as much as it did on the bottom-line. Net sales declined 12.4% year over year to $2,050.8 million and missed the consensus estimates by around $101 million. The volumes also decline 3% year-over-year to 662 million gallons, but managed to be within the company’s guided range. On the back of better pricing, adjusted operating income moved up seven-fold to clock $52 million.
Dean Foods exited the first quarter with cash and cash equivalents of $30.1 million, long-term debt including current maturities of $853.4 million and shareholders’ equity of $550.6 million. The company generated $157.6 million of net cash and $138.2 million of free cash flow from continuing operations.
New national brand
The company has been relying on innovation to drive growth. After having successfully launched TruMoo and TruMoo Protein, the company marched ahead and launched the nation’s first and biggest fresh white milk national brand – DairyPure. TruMoo, having 84% brand awareness nationally, is the number one flavored milk brand with nearly four times the volume share of its nearest competitor, Nesquik.
On the launch of DairyPure, Ralph Gregg A. Tanner - Chief Executive Officer & Director said:
“We believe DairyPure is a game changer for us, and that it will reinvigorate the dairy case. As the largest milk processor in the country and backed by a national footprint, we believe Dean Foods is the only company that could implement a launch of this magnitude.”
Riding on the success of TurMoo brand launch in 2011, Dean Foods expects that DairyPure will also be a growth driver in the long run because “for the consumer, DairyPure is on trend with their desire for a clean label, local, fresh, protein and nutrient-packed products.”
Dean Foods has developed a strong launch schedule for DairyPure products, starting with fresh fluid white milk which after the flawlessly executed launch in April is in stores now. Creams, school milk, and buttermilk will begin to roll out in June.
“2015 will be a year of investing in the DairyPure rollout, and we anticipate seeing the incremental opportunities and benefits of this national brand playing out over the long-term” said Gregg A. Tanner - Chief Executive Officer & Director.
Looking ahead
Dean Foods remains confident with its sequential gains and solid operational and financial results. On the back of improved capital structure and additional gains from the DairyPure brand, the company feels that it will be able to consolidate its position in the dairy market and enhance shareholder value. During the quarter, the company already declared dividend of $0.076 per share.
Despite single-digit decline in volumes, the management expects the second-quarter earnings to be in the range of $0.20-$0.30 per share.
Wrapping up
There will be continued pressure on volumes. The current valuation may be justified with forward P/E of 18.63 and P/S of 0.19. However, the company needs to deliver incremental improvements in profits to keep the investors interested. Shares are currently trading close to its 52-week high. Analysts expect the growth in next five years to be at a CAGR of 14.30% per year, versus a decline of 19.8% during the previous five years.
However, I would consider this as a good buy on pullbacks. Investors should buy on dips and hold for long-term gains.
