Dean Foods (DF) Q3 Earnings Meet, Bright View Drives Stock

Dean Foods Company (NYSE:DF) posted third-quarter 2016 results, wherein earnings matched estimates and sales surpassed the same. The quarter also witnessed the highest volume growth in four years. Further, management issued a robust outlook for the fourth quarter, as it anticipates this solid trend to continue. Consequently, shares of this Dallas-based food and beverage company gained 2.3% yesterday.

The company’s quarterly adjusted earnings of 37 cents per share came in line with the Zacks Consensus Estimate and surged 23.3% year over year. Notably, earnings for the quarter were close to the high end of the company’s guidance range of 32–40 cents per share.

On a GAAP basis, the company’s earnings came in at 16 cents per share compared with 22 cents reported in the year-ago quarter.

Quarter in Detail

Net sales declined 3.4% year over year to $1,964.6 million, but surpassed the Zacks Consensus Estimate of $1,957 million – thus scoring a hat trick of positive sales surprises. The year-over-year decline in the top line was due to a 1% dip in volumes to 651 million gallons from 658 million gallons in the prior-year quarter. Nonetheless, the volume decline was slower than the other quarters, thus marking its highest growth in four years now.

However, the Class I Mover, which is a measure of raw milk expenses, fell 8% year over year, while it escalated 12% sequentially to $15.11 per hundred-weight. Further, USDA data through August revealed that Dean Foods' share of U.S. fluid milk volumes jumped 60 basis points to 35.1%, on a sequential basis for the quarter-to-date period, though fluid milk volumes dipped 0.9% (on a reported basis) over the same time frame.

In the non-fluid milk product space, ice cream volumes gained 14%, mainly backed by contributions from the recently acquired Friendly's business. Overall, management remains pleased with the performance of its ice cream brands, despite the re-entry of popular ice cream brand, Blue Bell, in the industry.

Adjusted gross profit rose marginally by 0.2% to $493 million, while the adjusted operating income jumped 11.3% to $69 million in the third quarter.

Financial Position

Dean Foods ended the quarter with cash and cash equivalents of $28.2 million, long-term debt including current maturities of about $896.1 million, and shareholders’ equity of $589.9 million.

During the first nine months of 2016, the company generated nearly $184.6 million of net cash from operating activities and $103 million of free cash flow. During the quarter, the company deployed roughly $36 million as capital expenditure.

At the end of third-quarter 2016, the company's net debt to bank EBITDA ratio was 1.92 times, representing a sequential improvement.

Outlook

Management remains impressed with the company’s quarterly performance, given the robust volume growth, constant commitment toward curtailing costs and focus on its strategic plans. Sources revealed that Dean Foods has been on track to shift significant operations toward branded milk and ice cream products, which generate greater profits amid a competitive environment. Going forward, the company anticipates the volume improvement to continue in the fourth quarter, where it also expects to see better pricing and continued cost management.

Taking these factors into consideration, management expects the fourth quarter to mark Dean Foods’ eighth straight quarter of adjusted operating income enhancement.

Looking at numbers, management anticipates the average Class I Mover for fourth-quarter 2016 to come in at $15.96 per hundred-weight, representing a 6% sequential increase but a year-over-year decline of 2%. As mentioned earlier, volumes are expected to continue improving in the fourth quarter.

Assimilating all factors, management expects fourth-quarter 2016 adjusted earnings to range from 37–45 cents a share. The Zacks Consensus Estimate for the fourth quarter is currently pegged at 37 cents.

Zacks Rank

Dean Foods currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the consumer staples sector include ConAgra Foods, Inc. (NYSE:CAG) , Ingredion Incorporated (NYSE:INGR) and Lancaster Colony Corporation (NASDAQ:LANC) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ConAgra Foods’ earnings have outperformed the Zacks Consensus Estimate by an average of 10.7% in the trailing four quarters. Moreover, its long-term EPS growth rate of 8.8% and positive estimate revisions over the past 30 days bode well.

Ingredion Incorporated, with a long-term EPS growth rate of 11%, has seen positive estimate revisions for 2016, over the past 7 days. The company also flaunts a solid earnings surprise history.

Lancaster Colony has posted positive earnings surprises consistently for three quarters now. Also, the company has seen its estimates move north in the past 7 days.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>