Dean Foods Dives To 52-Week Low: What's Troubling The Stock?

Dean Foods Company (NYSE:DF) has lost investors’ favor lately due to dismal performances in the past few quarters. In fact, we believe the dark clouds shadowing upon this Zacks Rank #5 (Strong Sell) stock are far from fading.

Evidently, shares of this Dallas-based consumer goods company bottomed to a 52-week low mark of $10.37 yesterday, though it closed a tad higher at $10.42. Moreover, the stock plunged 52.2% year to date, wider than the industry’s decline of 49.5%. Nonetheless, the broader Consumer Staples sector gained 8.6%.

Why is the Stock Struggling?

Dean Foods is struggling amid a tough retail scenario that is characterized by fast-evolving consumer trends. Moreover, its volumes have been pressurized owing to stiff competition and macro headwinds. These factors, coupled with high raw milk costs, led the company to post third consecutive negative earnings surprise in the second quarter of 2017. Also, it has delivered average earnings miss of 15.2% in the trailing four quarters. Moreover, the company’s top-line lagged estimates in three of the trailing five quarters.

Going forward, management anticipates these obstacles to linger throughout 2017. In fact, raw milk costs are likely to increase both sequentially and year over year in the third quarter. Anticipating volume pressures to dent financial performance, the company lowered 2017 earnings outlook. It now envisions adjusted earnings per share in a range of 80–95 cents, significantly lower than the earlier forecast of $1.35–$1.55. The Zacks Consensus Estimate is currently pegged at 85 cents for 2017.

Notably, Dean Foods’ business is heavily dependent on commodities such as raw milk, soybeans, diesel fuel and others, the prices of which often fluctuate. Hence, a slight increase in the prices of these commodities will hurt the company’s margins.

In the last quarter, raw milk costs escalated about 15% year over year, though it was down around 9% on a sequential basis. However, the milk category remained soft as the USDA data through May 2017 revealed that fluid milk volumes dipped 2.9% year over year, on a quarter-to-date basis. As a result, Dean Foods' share of U.S. fluid milk volumes contracted 30 basis points.

Hence, we believe that if such fluctuations in raw material prices persist, it might pose a threat to Dean Foods’ operating results in the near term.

Is There Any Hope?

Dean Foods continues to make headway in its efforts to achieve the lowest cost position in the industry. Currently, the company is on track with its OpEx 2020 cost productivity plan, aimed at generating annual savings in a range of $80–$100 million by reducing waste in the organization. In this regard, Dean Foods enhanced its safety scores, improved the percentage of fluid shrink and completed designing its supply-chain network, in the first quarter. Also, it accelerated and expanded an aggressive set of commercial and cost productivity initiatives to address volume and mix issues witnessed in the last quarter.

Furthermore, Dean Foods has taken strategic steps to optimize its capital allocation and concentrate on core business activities, which is impressive. As part of this strategy, the company is looking to diversify its portfolio of brands moving beyond the pure milk products.

Bottom Line

Dean Foods’ strategic moves might display impressive results in the long run, simultaneously offsetting the aforementioned headwinds. But for now we have a list of solid stocks that you may consider instead.

Some better-ranked stocks in the broader Consumer Staples sector include Nomad Foods Limited (NYSE:NOMD) , Ollie's Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) and Ingredion Incorporated (NYSE:INGR) .

Nomad Foods has delivered positive earnings surprise of 13.6% in the last quarter and sports a Zacks rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ollie's Bargain Outlet, with a long-term earnings growth rate of 19.5% carries a Zacks Rank #2 (Buy). Also, the company’s earnings have outpaced the Zacks Consensus Estimate in each of the trailing four quarters by an average of 12.4%.

Ingredion, a Zacks Rank #2 stock, has a long-term earnings growth rate of 11%. Moreover, the company’s earnings have surpassed the Zacks Consensus Estimate in each of the last four quarters by an average of 5%.

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