Dean Foods: Dismal Expectations Offers Earnings Upside Surprise

| About: Dean Foods (DF)

You know the Wall Street drill, under promise so you can over deliver, and to say Dean Foods' (NYSE:DF) first quarter earnings expectations are in the "under promise" category is a understatement, as the Street is expecting the milk producer's earnings to slide a staggering 74%, from 23 cents to 6 cents, when they report this Tuesday before the market open. Analysts are also forecasting revenues of $3.07 billion, which surprisingly equates to a 3% uptick, but a bit too optimistic.

The good news is dismal expectations are usually easy to surpass and DF is way past due to deliver an upside earnings surprise. Look for Dean to beat earnings estimates by 33% when it could deliver earnings of 8 cents on sales of $3.05 billion in its historically weakest first quarter. The beat is contingent on DF's gross profit margin not falling below 23.25% (a 200 basis point drop).Surpassing expectations could spur an immediate 10-20% bump to the share price as shorts run to cover and bargain hunters scurry to buy so they don't miss the run-up.

Looking forward: management's fiscal 2011 guidance range of 55 cents to 65 cents is predicated on continued unfavorable milk pricing, a $30 million increase in interest expense (due to its recent debt restructuring) and $20 million worth of lost income attributable to yogurt divestitures. The fact is, things are slowly starting to improve, as wholesale milk prices have shown signs of stabilization and DF's cost cutting efforts are starting to pay dividends (in its latest quarter, its selling and distribution costs fell 90 basis points to 15.3%, while its general and administrative expense categories slipped 60 basis points to 5.2%). If these cost reduction trends continue, DF will probably end up earning closer to 75 cents, placing its stock at very reasonable 15 times estimated earnings.

Disclosure: I am long DF.