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.
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