Dean Foods Reports Q1 Loss - Analyst Blog

Dean Foods Company DF started 2014 on a dismal note wherein high raw milk prices dragged the company's first quarter bottom-line results. The company posted an adjusted loss of 5 cents per share from continuing operation compared with adjusted earnings of 31 cents in the year-ago comparable quarter. Moreover, it missed the Zacks Consensus Estimate of 2 cents per share.

This Zacks Rank #3 (Hold) company's adjusted earnings do not include the income from its former subsidiaries, The WhiteWave Foods Co. WWAV and Morningstar. On including these, the company reported a loss of 9 cents per share as against a gain of $5.30 in the year-ago quarter.

Quarter in Detail

Dean Foods' adjusted net sales inched up 2.1% year over year to $2,341.0 million from $2,292.4 million in the prior-year quarter and went ahead of the Zacks Consensus Estimate of $2,233.0 million. The year-over-year improvement in top-line was mainly driven by a 1% rise in milk volume which is much better than the industry average volume decline of 2.1%. Further, the company's market share of U.S. fluid milk sales volume declined 190 basis points (bps) year over year to 35.9%.

Adjusted operating income for the quarter decreased 90.8% to $6.9 million from the prior-year quarter figure of $74.2 million. Consequently, Dean Foods' adjusted operating margin for the quarter contracted 290 bps to 0.3% from3.2% in the prior-year quarter.

The year-over-year decline in operating income was primarily due to higher raw milk prices. The raw milk cost of Class I Mover registered a year-over-year increase of 22% and touched an all time quarterly high of $22.38 per hundred-weight.

Financial Position

The company ended the quarter with cash and cash equivalents of $57.8 million, long-term debt of $963.4 million and shareholder equity of $676.3 million. During the quarter, the company generated $32.8 million of net cash for continuing operations and $5.0 million of free cash flow.

Further, the company remains focused on curtailing its overall leverage. At the reported quarter-end, the company's funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio, as defined by its credit agreements, was 2.75 times, which was much lower than its maximum leverage covenant ratio of 5.25 times. This indicates the company's adequate financial flexibility to service its debt.

Additionally, during the reported quarter, Dean Foods bought back nearly 1.7 million of its common stock at an average price of $14.45 per share.

Outlook

Looking at the current industry volume trends, Dean Foods expects higher raw milk prices and weak volumes in 2014. Therefore, the company has lowered its earnings guidance for 2014 to 60 cents per share from the earlier projected range of 73 – 86 cents.

Furthermore, Dean Foods expects to report adjusted loss in the range of 2 cents to 8 cents per share for the second-quarter of 2014.

Other Stocks Worth Considering

Better-placed stocks in the food category business include Mondelez International, Inc. MDLZ and Pinnacle Foods Inc. PF. Both of these stocks carry a Zacks Rank #2 (Buy).