Why Now Is the Best Time for Investors to Bite Into Dean Foods

NEW YORK (TheStreet) -- After several quarters of stale returns, and seeing its stock plummet 23% since June, shares of Dallas-based Dean Foods (DF) are back to life Monday, climbing 15% as of noon, reaching a intraday high of $16.60 following the company's better-than-expected third-quarter earnings report. And if that price holds, Dean Foods may become even more appetizing for the next couple of quarters, according to analysts' targets.


The chart above, courtesy of Google Finance, shows how the milk company has struggled since reaching its 2014 high of $18.15 in June. The good news is, shares are now around their median target of $16.50, which suggests they may now head to $22 -- their high analysts' 12-month price target, which calls for gains of around 37%.

To top it all off, these shares, which (before Monday) had failed 16% over the past year, are cheap. The stock is trading at a trailing price-to-earnings ratio of 4.2, which is almost 17 points lower than the average price-to-earnings ratio of companies in the S&P 500 (SPY) , according to CNN Money.

And when compared to other food companies such as Mondelez (MDLZ) and ConAgra (CAG) , which are trading at trailing P/Es of 18 and 22, respectively, Dean Foods looks even more attractive. But it has to continue to execute, as it did in the third quarter.

For its part, Dean Foods posted a third-quarter loss of 17 cents per share. When adjusting for non-recurring costs and to account for discontinued operations, the loss was narrower at 3 cents per share, which beat Wall Street expectations of 13 cents per share. Third-quarter revenue of $2.37 billion also beat Wall Street estimates of $2.36 billion, according to research company Zacks.

And for the current quarter ending in December, the company projects profits to be in a range of 5 cents per share to 15 cents per share. That's a wide range, which suggests the company wants some margin of error. And CEO Gregg Tanner reminded investors of the struggles impacting the industry, saying, "Given the continued challenges facing the dairy industry due to the dairy commodity environment, we are encouraged by the sequential improvement of our operating results which we believe reflects the success of our current business efforts."

He added, "This year has clearly been the most difficult operating environment we've ever experienced as a company. And so, we remain rigorous in our focus on the things that we control: price realization, cost productivity and volume at margins that deliver an appropriate return."

That's the key takeaway from this report -- "focusing on the things the company can control." And Dean Foods has done this about as well as anyone. After selling its Morningstar Foods division to Saputo  for $1.45 billion over almost two years ago, the company spun off its stake in WhiteWave Foods Company (WWAV) into a separate entity, turning Dean Foods into a pure-play name in milk and other lower-end dairy products.

Dean's remaining businesses is now clear and easier to understand and its third-quarter revenue and earnings beat is a result of these maneuvers. In that regard, while discussing the company's sequential improvements, Tanner said he believes these past maneuvers will pave the way for his company rebuild its profitability in 2015 and position Dean Foods for long term success.

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

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


TheStreet Ratings team rates DEAN FOODS CO as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate DEAN FOODS CO (DF) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including poor profit margins, a generally disappointing performance in the stock itself and generally higher debt management risk."

You can view the full analysis from the report here: DF Ratings Report

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