Dallas based Dean Foods Inc. (DF) has become the nation’s largest producer of fluid milk and dairy products. The company has grown through acquisitions and now has more than 50 local and regional brands and additional private labels produced for grocery stores around the country.
Dean Foods labels in their Dairy Group include:
- Land O’ Lakes in the Midwest
- Meadow Gold in the west and the northwest
- PET in the southeast
- Garelich in the northeast
- Mayfield in the south.
Dean also produces and markets specialty products through its White Wave segment such as Silk soymilk, Horizon Organic Milk, International Delight coffee creamer and Land O’ Lakes creamers. The company is the country’s leading organic dairy products producer.
Dean is the 224th ranked firm in the Fortune 500. Primary competitors include ConAgra Foods Inc. (CAG) and Kraft Foods Inc. (KFT). As is the case with most food processors and distributors, Dean Foods operates with a small profit margin off high volume. In the most recent financial statement, the company reported a pre-tax margin of approximately 1.93%, compared to the industry average of 1.57%.
In 2007, the company declared a special dividend which negatively impacted their balance sheet. The move was highly criticized by analysts as restricting the company’s flexibility and jeopardized their ability to pursue additional growth through acquisitions. Earlier this year, Dean issued 19 million new shares to raise cash to retire debt incurred for the special dividend and to allow the company to resume their growth plan.
The company currently has an interest coverage ratio of 1.98, and a current ratio of 1.11. Dean is highly leveraged, with a debt to equity ratio of 7.49. Their leverage ratio is 5.5, below the level of 5.75 they covenanted to reach by year end. They project that they will be at or below 5.25 before the end of this fiscal year.
Fitch has recently confirmed the company’s BBB+ rating with a stable outlook. The stock closed at $15.33. The 52 week high for the stock was $29.33, and its low was $11.20. The stock is generally rated a buy by Wall Street analysts.
Solid Outlook
With dairy products minimally affected by the economic downturn, its organic products continue to grow as consumers become more conscious of the importance of a healthy diet.
Dean Foods’ bonds are actively traded. Bonds maturing in 2016 with a 7% coupon traded last week at a price of 81, generating a yield to maturity of 10.77%. Priced at this level the investor has a high current return and the opportunity for capital gains as the corporate debt market eases in the next year or so.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
