Dean Foods' (DF) Shares Decline 44% In 6 Months: Here's Why

Dean Foods Company (NYSE:DF) has been struggling with higher raw milk costs and lower volumes for quite some time now. Also, a tough retail scenario that is characterized by fast-evolving consumer trends has been weighing upon the company’s performance.

In the last six months, shares of the company have lost 44.1%. The downturn was wider than the industry’s decline of 40.1% and the broader Consumer Staples sector’s fall of just 0.9%. The stock also has a VGM Score of C.

What’s Denting Dean Foods’ Performance?

Dean Foods’ business is heavily dependent on commodities such as raw milk, soybeans, diesel fuel and others, the prices of which often fluctuate. Hence, any rise in their prices is likely to hurt the company’s margins, which is quite evident from the company’s third-quarter 2017 results. Though Dean Foods posted in-line earnings, it has lagged the Zacks Consensus Estimate for the last three quarters. Also, it has delivered negative earnings surprise of 15.2% in the trailing four quarters.

Also, sales lagged estimates for the second straight quarter. Both earnings and sales declined year over year. While, adjusted gross profit declined 9.1% to $448 million, the adjusted operating income was down by 34.8% to $45 million in the third quarter.

Results were hurt by soft volumes, higher raw milk costs and loss of share in U.S. fluid milk volumes. Moreover, lost sales volumes and incremental costs related to the recent hurricanes in both Texas and Florida weighed upon its performance. Consequently, management slashed earnings view to the 80-90 cents band for 2017 compared with 80-95 cents, guided earlier.

Additionally, stiff competition in the retail grocery industry, both geographically and particularly at the processor level, in all major product lines have been hurting Dean Foods’ results.

Estimate Revisions

The Zacks Estimate for 2017 moved down by 2 cents to 81 cents in the last 30 days. For 2018, it has moved south by 9 cents to 82 cents.

Can the Stock Rebound?

Dean Foods has been making efforts to revive its performance. To this end, the company has undertaken strategic steps to optimize its capital allocation and concentrate on core business activities. As part of this strategy, management is looking to diversify its portfolio of brands moving beyond the pure milk products.

In fact, the company expects to gain from the smart volume initiative through the rest of 2017 aimed at improving the top line, building margins and creating operating efficiencies. It also remains on track with its comprehensive productivity program including OpEx 2020 along with company-wide initiatives to drive efficiencies.

We believe these initiatives will go a long way in offsetting the aforementioned headwinds, but not anytime soon.

Looking For Solid Picks in the Consumer Staples Space, Check These

Some better-ranked stocks in the same space include McCormick & Company, Incorporated (NYSE:MKC) , B&G Foods, Inc. (NYSE:BGS) and Lamb Weston Holdings, Inc. (NYSE:LW) each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

McCormick, with a long-term earnings growth rate of 9.4% has pulled off an average positive earnings surprise of 4% in the last four quarters.

B&G Foods has delivered positive earnings surprise of 14.6% in the last quarter.

Lamb Weston, with a long-term earnings growth rate of 5.7% has come up with positive earnings surprise of 11% in the trailing four quarters.

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