Dean Foods shares fall as analysts question whether dairy company can find a buyer

Shares of Dean Foods Inc. fell on Wednesday after the milk and dairy supplier reported weaker-than-expected fourth-quarter earnings, announced it was suspending its dividend and said it was exploring strategic options, including a potential sale of the company.

The stock last fell 12% to mark its lowest level in 2019 so far. By noon, 3.9 million shares had changed hands, about three times their average daily volume.

The Dallas-based company is grappling with pressures that hurt other food companies, such as Campbell Soup Co. CPB,
and Kraft Heinz Co. KHC,
as retailers and competitors encroach on their space and consumer tastes change. Inc. AMZN,
sells milk online under its Happy Belly brand, while supermarket chains Walmart Inc. WMT,
and Kroger Co. KR,
offer private label dairy products. Demand for milk has been declining for years and producers now face competition from plant-based products, such as soy and wheat milk.

On Wednesday, Dean Foods reported a bigger-than-expected loss of $260.1 million, or $2.85 per share, for the fourth quarter, after earnings of $52.3 million, or 57 cents per share, at the same time a year ago.

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Excluding one-time items, such as a non-cash impairment charge, the adjusted loss per share was 50 cents, better than the FactSet consensus for a loss of 26 cents. Sales were about flat at $1.93 billion, compared to the FactSet consensus of $1.91 billion.

The company US:DF,
whose brands include Land O Lakes, Country Fresh and Dean’s, said it was suspending its quarterly dividend as part of moves to improve its balance sheet. The quarterly dividend was 3 cents per share, implying a dividend yield of 2.64% at Tuesday’s closing price.

“Our 2018 financial results reflect the volume deleveraging of some customers leaving our business, coupled with significant inflation in fuel, freight and resin costs,” Chief Executive Ralph Scozzafava said in a statement. “While we have made significant progress in executing our company-wide cost productivity plan, cost savings have been mitigated by additional transitional costs associated with a recent full consolidation of the plant.”

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During the company’s earnings call, Scozzafava said the company is still aiming to strengthen its private label business.

“To win in the private label business, we have to be the low-cost supplier and also transform how we go to market,” he told analysts, according to a FactSet transcript.

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Jefferies said the adjusted EPS number was 22 cents lower than its estimate. But analyst Akshay Jagdale noted that the company was still generating positive free cash flow, even in tough operating conditions. This “combined with the opportunity to reduce costs should generate strategic interest, particularly at these levels”. Jefferies is pricing the stock with a price target of $6, about 50% above its current trading level.

Stifel analysts said the strategic review came as no surprise given the well-documented challenges the company faces. However, the company is still the largest processor and distributor of fresh milk in the United States with a 36% market share, they said.

“We believe dairy categories and the national refrigerated supply chain offer value to large food retailers as retailers increasingly view dairy, especially private label dairy, as a category strategic to drive in-store trips,” the analysts wrote in a note. “Dairy categories have a particular advantage over pure e-commerce retailers, given the need for refrigeration and the frequency of purchases. That said, we don’t believe there is a single strategic buyer for the company as it is constituted today.

Stifel values ​​the stock as a reserve and has a price target of $5.

Bernstein analysts said it was uncertain whether Dean Foods could attract offers at a higher price given the state of its fundamentals.

“Currently, comparing the book value of all assets and offsetting the value of all liabilities yields a book value of $3.44 per share,” they wrote in a note. “If we exclude the goodwill and intangible assets that currently appear on the balance sheet, we end up with a value of only [about] $1.25 per share.

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This could, however, underestimate the fair value of the company’s goodwill, they said. They noted that when the company acquired Friend’s ice cream business in 2016 for $155 million, that company had annual sales of just under $166 million. Today, global ice cream sales are over $1 billion, though much of it is unbranded.

“On the other hand, Dean Foods’ existing manufacturing facilities and distribution network may not be worth 100% of their book value in the event of a fire sale,” Bernstein said. “Balancing these call and put options, Dean Foods’ valuation in a liquidation scenario is likely below its current book value of $3.44 per share.”

Shares of Dean Foods have fallen 54% in the past 12 months, while the S&P 500 SPX,
and Dow Jones Industrial Average DJIA,
each gained about 2%.

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Gerald R. Schneider