A Breakfast Club for Investors: Dean Foods Company (DF), Kellogg Company (K)

Do we need to have 280 brands of breakfast cereal? No, probably not. But we have them for a reason – because some people like them. It’s the same with baseball statistics. –Bill James (American baseball writer, historian, statistician)

It seems many people like breakfast cereals–in traditional and non-traditional formats. The advent of cereal bars has changed the morning breakfast routines of many consumers and opened up new revenue streams for cereal manufacturers. So should investors like breakfast cereal and milk companies?

Dean Foods Company (NYSE:DF) is a leading food and beverage company in the U.S. Their Fresh Dairy Direct segment is one of the nation’s largest processors and direct-to-store distributors of fluid milk marketed under more than 50 local and regional dairy brands and private labels. The company had 2011 net sales of $13 billion. They are the leader in conventional and value-added milk.

Concerning their Fresh Dairy Direct segment, the most recent financial reports are for the third quarter of 2012. Operating income was $94 million, compared to $75 million in the third quarter of 2011. Third quarter Fresh Dairy Direct adjusted operating income was $100 million, a 32 percent increase from $75 million in the third quarter of 2011.

Investors should research milk producers who are creative in marketing a basic staple product. In January, Dean Foods introduced a reformulation of their popular brand of chocolate milk, TruMoo.  The new product contains 35 percent less total sugar than the leading chocolate milk competitor, and it has 40 percent less sugar than its previous formula.

However, it seems “on-the-go” cereal bars are having an effect on milk producers. Not having a bowl of cereal, among other trends, is quashing milk consumption. Investors, going forward, must research this trend as they check out companies involved in the milk industry. An article in The Wall Street Journal (December 2012 – Ian Berry and Kelsey Gee) related that, “In an age of vitamin waters and energy drinks, the decades long decline in U.S. milk consumption has accelerated, worrying dairy farmers, milk processors and grocery chains.“

Dean Foods’ Fresh Dairy Direct fluid milk volumes declined 1.4 percent on a year-over-year basis, excluding the impact of divestitures. This compares to the balance of the industry, which experienced a volume decline of approximately 3.1 percent on a year-over-year basis, based on USDA data and company estimates. Investors should consider that Fresh Dairy Direct volumes continued to outperform the broader industry, while understanding that milk does have a bit of an image problem right now.