Dean Foods Inc. shares tumbled Wednesday after the milk and dairy-products supplier posted weaker-than-expected fourth-quarter earnings, announced it’s suspending its dividend and said it’s exploring strategic options, including a potential sale of the company.
The stock was last down 12% to mark its lowest level in 2019 so far. By midday, 3.9 million shares had changed hands, about three times their average daily volume.
The Dallas-based company has been struggling with pressures that are hurting other food companies, such as Campbell Soup Co. CPB, +0.92% and Kraft Heinz Co. KHC, -2.38% , as retailers and rivals encroach on their space and consumer tastes change.
Amazon.com Inc. AMZN, +1.95% is selling milk online under its Happy Belly brand, while supermarket chains Walmart Inc. WMT, -1.07% and Kroger Co. KR, -4.47% are offering store-branded dairy products. Demand for milk has been falling for years, and producers are now facing competition from plant-based products, such as soy and wheat milk.
On Wednesday, Dean Foods posted a wider-than-expected loss of $260.1 million, or $2.85 a share, for the fourth quarter, after a profit of $52.3 million, or 57 cents a share, in the same period a year ago.
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Excluding nonrecurring items, such as a noncash impairment charge, the adjusted loss per share was 50 cents, wider than the FactSet consensus for a loss of 26 cents. Sales were roughly flat at $1.93 billion, compared with the FactSet consensus of $1.91 billion.
The company DF, -2.00% , which brands include Land O Lakes, Country Fresh and Dean’s, said it was suspending its quarterly dividend as part of measures to enhance its balance sheet. The quarterly dividend was 3 cents a share, implying a dividend yield of 2.64% at Tuesday’s closing price.
“Our 2018 financial results reflect volume deleverage from certain customers exiting our business coupled with significant inflation in fuel, freight and resin costs,” Chief Executive Ralph Scozzafava said in a statement. “While we made significant progress executing our enterprise-wide cost productivity plan, the cost savings were mitigated by incremental transitory costs associated with a recent comprehensive plant consolidation.”
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On the company’s earnings call, Scozzafava said the company is still aiming to bolster its private-label business.
“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,” he told analysts, according to a FactSet transcript.
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Jefferies said the adjusted EPS number was a full 22 cents below its estimate. But analyst Akshay Jagdale noted that the company is still producing positive free cash flow even in dire operating conditions. That “combined with the cost takeout opportunity should garner strategic interest especially at these levels.” Jefferies rates the stock a hold with a price target of $6, or about 50% above its current trading level.
Stifel analysts said the strategic review was not a surprise given the well-documented challenges facing the company. However, the company is still the biggest processor and distributor of fresh milk in the U.S. with a 36% share of the market, they said.
“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,” analysts wrote in a note. “Dairy categories are uniquely advantaged against pure play e-commerce retailers given the need for refrigeration and frequency of purchasing. That said, we do not believe there is a single strategic buyer for the company as it is constituted today.”
Stifel rates the stock a hold and has a $5 price target.
Bernstein analysts said it’s uncertain whether Dean Foods can attract any bids at a premium given the state of its fundamentals.
“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,” they wrote in a note. “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.”
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That could understate the fair value of the company's goodwill, however, 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 below $166 million. Today, overall ice-cream sales total more than $1 billion, although much of that 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,” said Bernstein. “Balancing these puts and takes, Dean Foods’ valuation in a liquidation scenario is likely below its current book value of $3.44 per share.”
Dean Foods shares have fallen 54% in the last 12 months, while the S&P 500 SPX, +0.69% and Dow Jones Industrial Average DJIA, +0.43% have each gained about 2%.
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