Tuesday, June 12, 2007

Dean Foods (NYSE:DF): Color on warning

Dean Foods (NYSE:DF), the largest U.S. processor and distributor of milk and dairy products warned about 2 hours ago saying its full-year and second-quarter profit will be lower than expected, as raw milk prices reach all-time highs.

DF expects EPS of 30 to 31 cents in the second quarter, and $1.52 to $1.58 per share for the full year. Analysts, on average, were looking for 37 cents and $1.69 for the second quarter and full year. The co expects the third quarter to be "particularly challenging" as they face steep month-over-month increases in conventional raw milk costs, with an improvement in trend in the fourth quarter.

Notablecalls: The stock is going to get hit today but looking at the thing a bit more closely, I do think DF represents a nice bounce candidate. The raw milk price situation is well known across the industry. Several retailers have recently talked about the raising cost of food.

Deutsche Bank's Eric Katzman noted on May 10 that so far 2007 has been an action-filled and somewhat unusual year for Dean. Management reported 4Q06 results in early February with an optimistic view on 2007. This was followed by a very bullish CAGNY presentation, even though well regarded CEO Engles was not present due to sudden illness. Shortly afterward the company stunned investors and most likely many peer food companies by announcing a dramatic recapitalization, special $15 per share dividend and slightly more optimistic view of long term operating profit (from 6% to 7%) and free cash flow growth potential. The shares reacted well to all of these items, reaching an all time high of $37.48.

Yet suddenly management indicated with the recent 1Q07 results that a number of challenges had emerged and the earnings outlook for the remainder of 2007 was less visible. Management pointed to concerns over organic profits and rising milk cost, prompting DB to lower their 2007-2009 EPS estimates and to assume an additional profit warning when Dean updates investors on 2Q07 progress at the DB Global Consumer Conf. on 6/12/07. (That's today!)

According to Katzman, despite the estimate cuts, analysis of DF's LT segment EPS potentialsuggests fair value of $36. Katzman reiterated his Buy rating on DF, despite the expected warning saying his firm remains a believer in the long term value creation potential.

Also note that Morgan Stanley was out with a downgrade on DF already on May 3, taking their rating to Equal-Weight from Overweight based on expectations for lower earnings in 07/08 as well as the increased uncertainty on 2 of the key risk factors (raw milk price and competition at Horizon) they flagged going into 07.

MSCO took another swing at DF's EPS ests on May 17 lowering their 07 EPS forecast to $1.64 from $1.72 and 08 EPS to $1.76 from $1.78 saying their Bear case places further downside risk for 07 EPS at $1.47 and 08 at $1.35, implying a mid $20s PT. Firm's tgt currently stands at $35.

NC: Anyway, I would not be surprised to see DF stock to put together a nice bounce around the $30 level (if it gets there). Note that's the level where the 200 day MA lies.

No comments: