Dean Foods Reaffirmed at Neutral

We maintain our long-term Neutral recommendation on Dean Foods Company (DF). Moreover, it has a Zacks Rank #3 (Hold).

Why the Reiteration?

Dean Foods is a leading processor and distributor of milk and other dairy products in the U.S. It is also a major manufacturer of various specialty food products. Dean Foods continues to make headway in its efforts to achieve the lowest cost position in the industry. The company has benefited from its constant focus on cost-cutting measures such as the lowering of headcount across its businesses and closure of the plant network.

This is well evident from the company’s bottom-line results in the recently concluded quarter. Dean Foods’ earnings of 13 cents per share for second-quarter 2013 came within its guidance range and a penny ahead of the year-ago quarter figure mainly due to effective cost management. However, the earnings fell short of the Zacks Consensus Estimate due to lower sales and higher raw milk prices.

Further, we believe that the sale of the Morningstar business and spin-off of The WhiteWave Company has unleashed significant shareholder value, while improving the company’s focus on its core business that will likely bolster future growth.

However, anticipating an adverse impact on margins due to fluctuating raw milk prices, we prefer to be on the sidelines. Raw milk prices are projected to rise in the upcoming quarters. Furthermore, looking at the current industry volume trends, Dean Foods expects volumes to decline more than what is expected. Therefore, the company narrowed its earnings guidance range for full-year 2013 to 47–53 cents per share from 45–55 cents projected earlier.

Other Stocks to Consider

Other stocks worth considering in the food category business include Kraft Foods Group, Inc. (KRFT), Boulder Brands, Inc. (BDBD) and Dole Food Company Inc. (DOLE). All of these carry a Zacks Rank #2 (Buy).

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