Goldman upgraded Dean Foods to buy from hold, noting the company's potential for higher margins and gradual de-leveraging.
"We believe margins have now troughed and we see a path to margin recovery over the next few years, which should drive outsized profit growth," noted analyst Judy Hong.
"Given the improved pricing environment, we now have more confidence that [Dean Foods] should see some portion of its cost savings flow to the bottom line."The analyst added that while Dean Foods' "balance sheet remains highly levered, recent asset sales have improved the leverage profile a bit." Investors, pleased with Goldman's nod, bid Dean Foods shares 10.6% higher to $13.58 in morning trading Friday. Nearly 4.5 million shares changed hands just an hour into the trading session, compared with their average daily volume of 4.4 million. On Tuesday Dean Foods beat quarterly profit expectations and raised its 2011 outlook thanks to strong demand of its Horizon Organic brand of milk.
Dean Foods now expects to earn between 67 and 75 cents per share this year, up from its prior outlook for a profit of 55 to 65 cents per share. The guidance came in far ahead of analysts' call for 2011 earnings of 58 cents per share.
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