We’d Rather Watch Dean Foods (DF) Stock from a Distance, Says Deutsche Bank


Just as things were looking like they couldn’t get much worse for Dean Foods (DF), they just did.

On Tuesday the stock plunged another 36% to close the day just over a dollar. What’s causing investors to hit the exits? The company reported a much wider-than-expected loss for the second quarter and sales that did not meet analyst expectations. Specifically, the company lost over $60 million, up from $40 million last quarter and sales declined just over 5%.

In reaction, Deutsche Bank analyst Rob Dickerson reiterates a Hold rating on DF stock with a $2 price target, while lowering his estimates. (To watch Dickerson’s track record, click here)

Dickerson sees milk prices increasing throughout the year and risks to top line and gross margins still existing. The analyst has lowered his estimates on FY ‘19 EBITDA forecast by 55% to $50MM. This downward revision was largely driven by the Q2 miss of $58MM.

With all of these negatives on the horizon what is next for Dean Foods?

Many investors are wondering if the company will ride out the current storm or change things up. The company’s new CEO Eric Beringause who started just a week ago did not have much to say about the recent moves in the stock price but did have a positive outlook. Having lots of experience within the dairy sector, Beringause noted that the industry is very cyclical and certain factors like raw material costs, production overcapacity and retailers competitive pricing should reverse in time. However, Dickerson remains cautious as to whether the national milk processor model remains relevant in today’s dairy industry. Since milk processing is very capital intensive, and Dean Foods capacity utilization currently sits around 50%, he remains skeptical that Dean Foods can really tweak their P/L without any structural change.

As the new CEO dives deep into the problems, he notes the company’s competitive strengths and structural weaknesses, and believes that further will have to be done beyond what is currently taking place to improve the company’s profitability. The analyst believes that although some may say Dean Foods are taking steps in the right direction, they would rather watch from a distance before more is proven.

Long story short, there is a lot of proving that Dean Foods will have to do to gain the trust of this analyst, and he will be watching from the sidelines.

It appears the voice of the Street backs Dickerson’s sidelined vantage point on the food and beverage maker. Out of the 6 analysts polled in the past 12 months, 5 rate Dean Foods Company stock a Hold, while 1 rates the stock a Sell. (See DF’s price targets and analyst ratings on TipRanks)

 

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