Morgan Stanley Upgrades Dean Foods, Cites 'More Balanced' 2018

Shares of Dean Foods Co DF have lost more than 40 percent over the past year, but one analyst sees a "more balanced" setup for 2018.

The Analyst

Morgan Stanley's Matthew Grainger upgraded Dean Foods' stock from Underweight to Equal-Weight with an unchanged $11 price target.

The Thesis

Many of the fundamental pressures plaguing Dean Foods over the past year remains unchanged but after a more than 40 percent decline in the stock in 2017, the setup for 2018 is more balanced, Grainger said in a note. Specifically, the company's EBIT profile of $0.073 per gallon is unchanged but the company can now benefit from an approximate 10 percent decline in Class I milk costs and an improvement in private label margins. Other tailwinds that were not present in 2017 include more aggressive cost savings, portfolio optimization measures, and a benefit from tax reform.

Dean Foods' stock is now trading at a 5.8 times C2018 EV/EBITDA multiple, which represents a discount to its five-year average of 6.3 times, Grainger said. The analyst's $11 price target implies a 5.5 times multiple, which implies minimal downside potential in 2018.

Price Action

Shares of Dean Foods traded higher by more than 3 percent Wednesday morning, but neared the close up less than 1 percent at $11.35.

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