In retrospect, Tuesday’s news that Dean Foods (NYSE:DF) was exploring strategic alternatives should have been a clue that Wednesday’s earnings report would be anything but great. Thriving companies don’t need to change a thing. Still, the actual depth of the company’s woes was shocking. Dean Foods stock plummeted nearly 14% on Wednesday, after falling short of already-low earnings estimates and suspending its dividend.
Most damning of all, however, was legitimate analyst concern that the company behind brand names like Land O Lakes, Dairy Pure and TruMoo wouldn’t actually find a willing buyer for the company as a whole, or in pieces.
It’s not exactly Dean Foods’ fault. Although milk prices have been stable since 2015, they’ve stabilized at roughly one-third less than 2014’s average.
A Look at Dean Foods Stock Woes
Worse, Dean Foods now competes with the very companies that were and still are distributors of its product. Kroger (NYSE:KR) and Walmart (NYSE:WMT), along with other retailers, now offer so-called ‘private label’ house brands.
Unlike Deans though, major grocery chains can afford to use milk and other dairy products as a loss-leader. Stifel analysts responded to Wedneday’s quarterly update, “We believe the dairy categories and national refrigerated supply chain offer value to large grocery retailers with retailers increasingly viewing dairy, in particular private label dairy, as a strategic category to drive in-store traffic trips.”
End result? The organization lost 50 cents per share of Dean Foods stock last quarter, versus analyst expectations for a loss of 26 cents.
The poor report extends an ever-worsening streak of fiscal trouble.
In short, time has caught up with Dean Foods. Something has to change now. There’s no assurance it will, or even can change, however.
Clearly the company knew on Tuesday when it announced it was mulling strategic alternatives Wednesday’s quarterly report would again be dire enough to leave it no choice but to seek out a partner, or buyer. Indeed, Dean Foods has likely sensed for a while this day of reckoning would arrive.
The dairy outfit may have waited too long, however.
Ken Goldman, an analyst at JPMorgan Chase & Co., said in a report Wednesday, “If Dean Foods does happen to find a buyer (unlikely, in our view), the stock will probably be purchased at a discount to the current price…Dean is a levered company with a fast-deteriorating business and numerous out-of-date production facilities.”
Bernstein’s analysts concurred, backing their thesis up with some number-crunching, explaining, “At present, comparing the book value of all assets and netting off the value of all liabilities yields a book value of $3.44 per share. If we exclude the goodwill and intangibles that are currently on the balance sheet, we end up with a value of only [about] $1.25 per share.”
The current DF stock price stands at just below $4.00.
Stifel’s analysts were even more direct on the matter: “We do not believe there is a single strategic buyer for the company as it is constituted today.”
Looking Ahead for Dean Foods Stock
Matters could get worse before they get better. Morgan Stanley analyst Pamela Kaufman, who optimistically holds a price target of $6.00, conceded the company’s current cost and pricing challenges could persist through 2019.
That’s time, however, Dean Foods may not have.
The outlook for milk prices this year is only a very modest improvement on last year’s average. And, although still producing positive cash flow, each passing day provides more opportunity for rivals like Kroger and even Amazon.com (NASDAQ:AMZN) to expand their in-house supply chain.
Dean Foods is pushing back by aiming to serve that particular market rather than compete with it. CEO Ralph Scozzafava commented during the earnings call, “To win in the private-label piece of the business, we must be the low-cost provider and also transform the way we go to market.” But, the company appears to be behind on both fronts.
Dean Foods may have just passed its expiration date.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.