Dean Foods Co New (NYSE:DF)

CAPS Rating: 3 out of 5

A leading processor and distributor of milk and other dairy products, Dean Foods sells more than 50 private-label brands to grocery stores.

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Player Avatar ScryingPool (< 20) Submitted: 3/24/2011 4:51:59 PM : Outperform Start Price: $9.63 DF Score: +17.58

WHY DEAN FOODS (DF) IS UNDER-VALUED:Dean Foods is the largest packager/distributor of milk products in the United States. They also lead the market in coffee creamers with their flagship brand “International Delight”. Besides “Dean” milk, here are some other brands of theirs you may have heard of: “Silk”, “Horizon”, “Land-O-Lakes”, “Alpro”.Over the past 3 years, dairy companies have been one the hardest hit sub-sectors of the agricultural industry. They’ve been wounded by low milk prices pending the food & commodity bubble of 2008 and the subsequent panics that spurred investor exoduses throughout the recession as well as the recovery. Historic profit margin lows, despite steady revenues, were generated by a drawn-out unfavorable per unit ratio of CME milk valuation to the cost of production ($/gal of CME Grade III/IV : $1.60/gal). This accompanied with the dairy-sector investor exoduses, insider holding declines, share dilution (*See Fool stats - stagnant/increasing revenue w/ decreasing EPS), have brought about beyond belief under-valuation for a massive firm. WHY INVEST IN DEAN FOODS?Only until recently (December 2010), milk prices noticeably twitched upward for the first time after 3 years of decline. Supply is down, this may be a sure signal of the dairy sub-sector reacting to prolonged deflation. Isn’t it strange that Dean’s revenue remains unchanged over these past 3 years despite declines in demand and pricing for milk (which accounts for more than half of their revenue)? The reason for this is because Dean has quantifiably increased sales via the expansion of their recently acquired brands like the organic milk “Horizon” and via variant introductions (i.e. flavors) for existing brands like “Silk”. Revenues have increased despite sub-par milk prices and overall lack of market equity in the dairy sector. This is a planned movement by Dean called “Whitewave-Alpro” and it is being executed successfully along with a $300 million cost-cutting program. Dean has positive earnings estimates 2011 and 2012 (*see Fool growth rates). Sector analysis: if you read the news, you’ll notice the rate of milk production is declining (a reaction to a prolonged demand dive and negative speculation), a pharmaceutical company released a drug to combat allergies nearly 3% of children have with milk, parents are just starting to complain about increasing milk prices, the FDA and various foreign agencies blocking out supply from Japan, Goldman Sachs’ retaining of a neutral rating for DF (which means they’re probably buying shares right now).All these are signs of impending demand during a long, strong period of negative speculation. The only question I have is why two top executives (incl. their COO) resigned this past quarter. If you have an answer or conjecture, I’d like to know it! Citations:(CME Milk prices) http://www.cmegroup.com/popup/mdq2.html?code=DCH1&title=March_2011_Class_III_Milk&type=p#period=W(Whitewave-Alpro)http://www.whitewave.com/(Dean Foods Quarterly Report)http://www.deanfoods.com/our-company/investor-relations/events--presentations.aspx

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