A few weeks ago, I highlighted Dean Foods (NYSE:DF) as a good value stock. The market, however, seems to have other ideas. Yesterday, the company missed its earnings estimate by five cents a share (23 cents versus 28 cents; in February Dean gave a range of 25 to 30 cents). The stock responded by dropping 28% and it’s down again today. DF is now below $10 a share. It’s never a good idea to tell Wall Street to expect one thing and deliver another.
Wall Street had been expecting Q2 earnings of 41 cents per share. Instead, Dean said it will range between 23 and 28 cents per share. The problem is that there’s a price war going on in the milk business and that’s hurting profit margins. Dean’s Q1 actually beat Wall Street’s revenue target. The issue is turning those sales into profits.
The WSJ reports:
Dean Foods Co. Chairman and Chief Executive Gregg Engles said gains by private-label producers are accelerating despite an improving economy, noting that in some regions, a half-gallon of his company's milk costs more than a gallon of an unbranded product. Major retailers routinely use discounted staples such as milk, bread, eggs and meat to drive foot traffic, and private-label food products gained market share as consumers traded down during the recession.
Cheaper private-label products have been gaining food-industry market share for years, but Mr. Engles is acknowledging that the weak economy may have forced a long-term change in consumption that holds ramifications for margins and investment. Milk prices have firmed in recent months after a volatile period, but Mr. Engles said efforts to push through increases at the retail level have failed to stick.