Should You Buy It? Not on Dean Foods List

With a strong earnings report Wednesday, Dean Foods DF showed it's a company that is learning to cope with rising commodity costs. Dean is the country's largest producer of fluid milk and other dairy products, with more than 50 brands, including Borden, Land-O-Lakes and Horizon Organic.

The company earned 23 cents a share in the first quarter, which was 5 cents ahead of the consensus analyst estimate. Revenue grew 17% year over year to $3.08 billion, matching expectations. Volume was down 1%, but Dean Foods was able to pass along higher costs to customers.

Management also guided for second-quarter profit between 26 cents and 31 cents, in line with previous estimates, and said that it plans to earn at least $1.20 a share in 2008.

Buy Dean Foods? No Whey, Jose

As a result, the stock gained about 3% Wednesday, closing at $23.24. While the stock is now up 4 points from its March lows, Dean Foods is also down some 14 points from where it was trading a year ago.

With that in mind, I'm here to answer readers' questions: Should you buy it? Can Dean Foods continue to trade higher from current levels, or are investors better served focusing elsewhere? Looking at value stocks is my bailiwick here at TheStreet.com, where I run the Value Investor service. (Click here for a free trial.)

Despite the upside earnings surprise, profit at Dean Foods fell 54% year over year, in part because of a 39% increase in milk costs. Milk is a consumer staple, but rising prices have also led consumers to shift their buying toward private-label brands, which carry lower margins for the company.

While milk prices did pull back 9% sequentially from the fourth quarter, Dean still generates 80% of its overall revenue from this division. And looking forward, management said on the conference call that it expects continued volatility in milk pricing over the coming months.

In the meantime, Dean Foods has a hefty $4.8 billion debt load, equal to 1,100% of shareholder equity. About half of this was taken on to fund a one-time special dividend of $15 a share in April 2007, but current investors are still paying the bill.

While the company generated about $136 million of free cash flow over the past four quarters, Dean Foods has $200 million of debt coming due in 2009, and its high leverage gives management little leeway if rising costs and a weaker consumer continue to hamper margins.

With that in mind, I believe that readers should not chase shares of Dean Foods at current levels.

Dean Foods is not included in TheStreet.com Value Investor model portfolio. David Peltier writes regularly about value stocks, such as Kraft FoodsKFT, Ingersoll-RandIR and Jones ApparelJNY, for TheStreet.com.