No Appetite for Dean Foods

NEW YORK (TheStreet) -- It's been over a year since Dean Foods (DF) announced it was selling its Morningstar Foods division to Saputo for $1.45 billion. Six months later, in May 2013, the company's board of directors agreed to spin off the company's stake in WhiteWave Foods Company (WWAV).

According to some analysts, these moves justified a higher multiple on the shares, which closed Friday at $15.08, down 12% for the year to date. It didn't take long for investors to soak up the excitement. These maneuvers positioned Dean Foods as a pure play in milk and other lower-end dairy products. The Street applauded, sending the stock soaring close to 60% in the six months that followed.

The consensus was that Dean's remaining businesses became clearer and easier to understand. Although this might have been true, management never fully outlined how the company's long-term strategy would reward investors. The way I saw it, the only real benefit management achieved was compiling the liquidity needed to service the company's massive debt and shoring up the balance sheet.

I don't want to say management's back was against the wall, but Morningstar Foods was a strong-performing asset that management would have rather kept. I'm just speculating here. These are my words -- not the company's. But the fact that Morningstar Foods specialized in extended-shelf-life products like sour cream and creamers made it hard to replace.

Besides, there aren't too many businesses, especially in the dairy industry, that are generating the cash flow and earnings before interest, taxes, depreciation, and amortization to the extent of Morningstar Farms.

Well, from there, the milk spoiled. Fast-forward one year later and Dean Foods shares are right back where they were at the beginning of 2013 -- falling 30% from its 52-week high.

The Street eventually realized that even though Dean Foods has made significant strides in its restructuring, including reducing its net debt to just $671 million in the November quarter (down from $4 billion), there are still questions about the company's operating structure. Adjusted earnings per share have been on a decline, while revenue has been flat. The 78% year-over-year decline in operating income did nothing to convince analysts that the margin situation will improve any time soon.


Management, however, remains optimistic. To its credit, it has been upfront and honest about the company's situation. Nor has management pretended the company's recent results were better than they were. Gregg Tanner, the company's CEO, talked about "enhancing the company's strengths and capabilities." I only wish I knew what these strengths were and how these capabilities will be extended.

But after working so hard over the past 18 months shedding off assets and cutting off some fat, I'm more interested in seeing progress with margins. At this point, I can't say I agree with management's decision to begin "aggressively reducing costs." This strategy is counter-intuitive to the company's goal of building any sort of competitive advantage. Saving your way towards growth doesn't work -- not when you're already playing from behind.

Not to beat up on management or anything but relative to, say, Kraft (KRFT), Dean Foods has only had limited success in branding its business to produce strong returns. So, while the stock does appear more attractive than where it was six months ago, the operational risks are still too high. Not to mention, milk demand is still falling faster than supply.

On Tuesday the company will report fourth-quarter and full-year results. The Street will be looking for 19 cents in earnings per share on revenue of $2.28 billion, which would represent a year-over-year revenue decline of 33%. This is while earnings per share is seen as falling 76%. These numbers are unattractive, to say the least. But the Street is taking into account that the business is in the midst of an extensive changeover.

In these situations, what investors want to see are small steps, or signs of sequential improvement -- particularly with margins and free cash flow. But more than anything, what management says about the company's progress should determine how the Street reacts.

For now, I would advise staying away from the stock despite the company becoming more shareholder-friendly by adopting a new dividend policy. This was another decision with which I disagreed given the company's liquidity situation.

All told, I just don't see any quick fixes with this operation, which just might remain in a perpetual restructuring mode, at least for the next couple of years.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

More from Opinion

3 New Investing Myths That Must Be Busted

3 New Investing Myths That Must Be Busted

Why a Global Stock Market Crash Is Coming

Why a Global Stock Market Crash Is Coming

Sears CEO Eddie Lampert Looks Like He Is Sucking Company Dry

Sears CEO Eddie Lampert Looks Like He Is Sucking Company Dry

Nasdaq Exec: Exchange Is 'All-In' on Using Blockchain Technology

Nasdaq Exec: Exchange Is 'All-In' on Using Blockchain Technology

It's Dumb to Think Legalizing Weed Is Still a Political Issue

It's Dumb to Think Legalizing Weed Is Still a Political Issue