Dean Foods missed analyst earnings estimates by a single penny recently, which ordinarily I wouldn’t make much of a big deal over. In fact, the 8% sell-off the next day probably had more to do with the company’s painfully bleak outlook, in which management highlighted several factors that will slow business performance, leading to full-year earnings that are expected to be flat at best, but may fall by as much as 15%. And yet, some analysts are turning contrarian and making the case that the major milk maker is not sour.
Nearing its expiration date?
Management highlighted no less than four problems working against the company in the recent earnings release.
First, raw milk prices are at all-time highs right now. Last quarter, management expected prices to fall somewhat before rising again near the end of 2014, but that hasn’t played out. Prices have simply continued to climb, largely because of demand from China, whose domestic milk production has been constricted by weather and other factors.
Second, Dean lost a huge customer in 2013. My colleague Michael Lewis is coy about that customer in his defense of Dean, referring to it as just «a very big one.» Well, when it comes to grocery items, it’s just about the biggest — Dean lost its contract with the juggernaut Wal-Mart, it’s single biggest customer and one of the biggest players in the industry.
Third, Dean isn’t the only milk company suffering. Industry volumes were down 2.2% in 2013, with higher prices and a reduction in Supplemental Nutrition Assistance Program benefits having a negative impact on domestic demand. While reductions in SNAP benefits are an ongoing political issue at the moment, declining milk demand is not a new problem. My attempts at the GOMAD diet notwithstanding, milk demand has fallen 25% since 1975, and it’s been pretty constant and gradual, making it hard to say where the bottom will be or if the industry can recover in the long-term.
Source: Daily Finance