UPDATE: BMO Capital Markets Upgrades Dean Foods Co. to Outperform, Raises PT on Improving Operations, Lower Interest Expense

In a report published Monday, BMO Capital Markets analyst Amit Sharma upgraded the rating on

from Market Perform to Outperform, and raised the price target from $22.00 to $23.00. In the report, BMO Capital Markets noted, “We believe DF's stock price does not adequately reflect a likely inflection point in its operating performance as well as investor base, spurred by peaking dairy costs, accelerating costs savings, and greater visibility to its shareholder-friendly capital reallocation. First, rising global milk supplies signal that Dean's raw milk costs will peak in November. We expect class 1 milk prices to decline from $20 per cwt to $17 in 1Q14 as lower feed costs, favorable weather, healthy inventory levels, and high farm-gate milk prices lead to record-high milk production in key global dairy regions. Second, DF's milk volumes should bottom out in the current quarter and improve sequentially as the loss of a portion of its private-label milk volumes are cushioned by new distribution wins as well as a likely improvement in overall fluid milk volumes. Third, stable milk spread and accelerating cost savings likely will raise DF's operating profits to $0.14-$0.16 per gallon levels. Although margins likely will remain at historical levels, new management's strategic shift from “market share leadership” to ‘cost leadership' should lead to a consistent, and measurable, improvement in profitability. Fourth, the successful, tax-efficient divestiture of non-fluid milk assets has materially lowered leverage and should lead to other value-creating actions, attracting a new investor base. We are adjusting our 3Q13 and 4Q13 EPS estimates to $0.13 and $0.27, while raising our 2014 and 2015 EPS estimates to $1.33 and $1.56, driven by improving operations and lower interest expense.” Dean Foods Co. closed on Friday at $18.28.