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:
- 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.
- There has been no insider buying of the company's shares.
- Management's ability to communicate its vision with Wall Street has been weak at best.
- 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.