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I was perplexed why Mr. Market actually praised Dean Foods' (DF) fourth quarter report yesterday, by tacking on a 6% gain to its stock price. In the pre-market, the shares were getting punished on the news (dropping just under $9), and unfortunately for me, I got spooked, and hit the sell button at $9.20, only to see the shares spike 16% later in the session. The good news is, I should be happy that I refrained from the temptation of opening a short position, or else I would have really been in a world of hurt!

The report was just not that good, especially considering guidance was again hacked, now to a range of 55 cents to 65 cents for calendar year 2011. On a forward basis, the shares are selling at nearly19 times estimated earnings, which frankly is expensive for a company caught in a nasty trend of deteriorating fundamentals.

Here are the red flags:

  1. Debt is way too high at $4.1 billion, and as a consequence, interest expense is slated to rise 12%, to a staggering $265 million in 2011.
  2. There has been no insider buying of the company's shares.
  3. Management's ability to communicate its vision with Wall Street has been weak at best.
  4. The sale of its yogurt operations will eliminate $20 million in operating earnings, but save just $2 million in interest outlays. Lose $20 million to save $2 million? I don't like the math here.

Bottom line: I loved the valuation in the low $7's , but after a 50% run-up, the shares have become expensive again. I'll be looking to get back in after a 20% haircut to the $8.50 area. Until then, there are better opportunities elsewhere.

Source: Why I Have Soured on Dean Foods