The Street Doesn’t Recognize a Slimmer Dean Foods Company (DF)

Dean Foods may not have the fast-growing, higher-margin segments it did just a year ago, but management seems to be very effective at tightening up the ship for a leaner future. Further cost-cutting measures and a $25- million-per-quarter reduction in interest expense are on tap for 2013.

Misguidance
On the whole, Dean Foods had a great quarter — keeping sales up in a very difficult environment (commodity prices and margin pressure). This, in my opinion, should be enough to convince investors of management’s ability to effectively operate this business in tough times. Everyone looks good in up times; the important time to evaluate is when the business environment is suffering.

Management made one mistake, and it wasn’t really a mistake: They gave tepid guidance under Wall Street expectations.

For 2013, the company is expecting mid-single-digit operating income growth while focusing on generating more free cash flow. The company has grown its market share in the fluid milk business over the last two years, but this year a lost bid for a private-label buyer may prevent Dean Foods from growing market share again this year.

As far as the numbers go, Wall Street was expecting more than Dean’s 2013 EPS forecast of $1.00 to $1.10. 2012’s was $1.39, but of course, included the other two business segments.

As usual, I find Wall Street to have missed the point on this earnings release. Dean Foods’ management is very talented and has managed the deleveraging and consolidation process in a smart manner. The milk business is a tough one, affected by declining consumption and lower birth rates, but I believe this team knows how to navigate these waters as they have been for decades.

The article The Street Doesn’t Recognize a Slimmer Dean Foods originally appeared on Fool.com and is written by Michael B. Lewis.

Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Dean Foods Company, WhiteWave Foods, and Whole Foods Market.

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