Dean Foods Surges on Goldman Upgrade

DALLAS ( TheStreet) -- Dean Foods ( DF) shares surged Friday morning after analysts at Goldman Sachs ( GS) upgraded the dairy maker to a buy rating.

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.

Dean Foods said it worked more aggressively to cut expenses in the recent quarter as commodity costs continued to rise. The producer of milk, dairy and dairy-related products cut 140 jobs, and expects to more than double its earlier goal of cutting $30 million in selling, general and administrative expenses from 2010.

As a roster of food and beverage companies have noted, Dean Foods said it may raise prices on some products to offset rising costs, and has already been able to pass on some costs to consumers at its Fresh Dairy Direct-Morningstar segment, where demand was softer in the recent period.

Tyson Foods ( TSN), which said Monday that rising feed costs offset higher prices leading to flat year-over-year earnings in its recent quarter, raised prices for chicken, beef and pork as global grain costs surged.

Sara Lee ( SLE), Starbucks ( SBUX), ConAgra Foods ( CAG), Kellogg ( K) and Coca-Cola ( KO) have all said recently their financial results were impacted by higher commodity costs, and implemented price increases to help offset those costs.

Dean Foods' net income in the recent quarter came to $25 million, or 14 cents per share, down from $43 million, or 24 cents per share, in the year-earlier period. Total revenue grew 3% to $3.05 billion, from $2.96 billion.

Analysts expected Dean Foods to report a first-quarter profit of $10.1 million, or 6 cents per share, on revenue of $3.07 billion.

-- Written by Miriam Marcus Reimer in New York.

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