Dean Foods' financials belie hopes of a dairy recovery
By Bruce Blythe
| Tuesday, February 09, 2010
The U.S. dairy industry is expected to muster some form of a recovery this year after a miserable 2009. Yet, Dean Foods Co.’s stock price suggests investors aren’t fully convinced that will happen.
Shares in Dean Foods, the country’s largest dairy processor, are down almost 4 percent so far this year, reaching a seven-week low Feb. 9 and lagging many other food-maker stocks.
Dallas-based Dean Foods, scheduled to release fourth-quarter results Feb. 10, is expected to report a 12-percent decline in net income, to about 38 cents a share from 43 cents a year earlier, based on analyst estimates compiled by Bloomberg LP.
Even as milk prices rise, Dean Foods and the rest of the dairy industry face a tenuous economic recovery that will determine whether recent improvement in demand will continue, said Scott Brown, a dairy economist at the Food and Agricultural Policy Research Institute in Columbia, Mo.
“The big question is where you think the general economy is going to be in 2010,” Brown said. “At the end of the day, that has a lot to do for a company like Dean Foods’ financials.”
“Most of the signs would suggest that while 2010 may be better, it’s not going to get us out of this difficult financial situation we saw in 2009,” Brown said.
Milk prices plummeted last year amid overproduction and weaker demand, forcing dairy producers to slash herds as losses swelled. The U.S. milk-cow herd fell to 9.08 million head at the beginning of 2010, down 2.7 percent from a year earlier, according to a Jan. 29 U.S. Department of Agriculture report.
“We expect dairy prices will continue a general upward trend through next year,” Dean Foods Chief Executive Officer Gregg Engles said in a Nov. 2 statement. However, with relatively high inventories and sluggish global demand, “we do not foresee a return in 2010 to the record dairy price levels we experienced over 2007 and 2008,” he said.
While margins came under pressure last year, Dean Foods’ balance sheet remained firmly in the black (the company’s net income rose 62 percent to $190 million during the first nine months of 2009).
Despite rising prices, dairy producers still have a deep hole to dig out of, Brown said.
Brown projects U.S. all-milk prices will average $16.50 per hundred pounds in 2010, up 29 percent from $12.81 in 2009.
“At best, that’s a break-even year” Brown said, referring to his 2010 price forecast. “Given where prices are today… and all the equity we lost in 2009, 2010 isn’t really going to allow us to get much of that equity back.”
Cash receipts for U.S. dairy producers totaled $23.9 billion in 2009, down 31 percent from $34.8 billion in 2008, Brown said, citing USDA data.
March Class III milk futures traded on Chicago-based CME Group rose 13 cents to $13.68 per hundred pounds today. The December contract fell 6 cents to $15.16.
High inventories will weigh on butter and cheese prices even as milk production declines, Stifel, Nicolaus & Co. analyst Chris Growe said in a January report. The industry is in a “unique” position where prices for butter and nonfat dry milk, rather than cheese, are the key drivers of milk prices, he said.
For Dean Foods, market fundamentals are aligning for even stronger profit in 2010, analysts say. The company should be able to command higher prices for its products, and any a spike or crash in raw milk prices is unlikely.
Current milk prices are “conducive to farmer expansion, but we believe it will occur at a measured pace, given the very low prices and returns of the last year,” Growe said in the January report. “The global demand picture is soft, and unlikely to lead to any spike in prices in the short run.”
Growe has a “buy” rating on Dean Foods shares, which rose 26 cents to $17.68 in late trading today. The stock is down 6.1 percent over the past 12 months, compared to a gain of 7.8 percent for the Amex Consumer Staples Index.
