Will Higher Milk Costs Weigh on Dean Foods (DF) Q1 Earnings?

Dean Foods Company DF is slated to report first-quarter 2018 results on May 8. The company has a dismal earnings surprise history, missing estimates in five of the trailing seven quarters. In the remaining two quarters, it reported in line results. Also, the company lagged sales estimates in 10 of the last 13 quarters.

We expect Dean Foods to continue with its dismal surprise history in the quarter to be reported on both earnings and revenue front. Apparently, the Zacks Consensus Estimate of 12 cents for the first quarter declined by a penny in the last 30 days and portrays a year-over-year decrease of 7.7%. Further, analysts polled by Zacks expect quarterly revenues of $1.84 billion, down 7.9% from the year-ago quarter.

Dean Foods Company Price, Consensus and EPS Surprise

Dean Foods Company Price, Consensus and EPS Surprise | Dean Foods Company Quote

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Dean Foods has long been facing challenges related to lower product volumes, escalated raw milk costs and loss of share in U.S. fluid milk volumes. Also, the company’s business is heavily dependent on commodities such as raw milk, soybeans, diesel fuel and others — the prices of which often fluctuate. Therefore, any rise in price of these commodities is likely to hurt margins and profitability.

In the last reported quarter, adjusted gross profit declined 9.9% while the adjusted operating income decreased by 39.2%. Besides missing sales and earnings estimates in fourth-quarter 2017, bottom line plunged 34.2% year over year while top line fell 4.1%. Moreover, total volumes across all products dropped 6% from the year-ago quarter.

Per sources, softening demand for milk in the United States has been taking a toll on Dean Foods for quite some time now. Non-dairy substitutes such as almond and oat milk as well as other beverages have been marring demand for milk.

Furthermore, the retail grocery industry experienced significant consolidation in recent years. As a result, competition has intensified among dairy product suppliers.

The aforementioned headwinds have largely dampened investors’ confidence on the stock. Shares of the company have plunged 57.2% in a year, significantly wider than the Consumer Staples sector’s decline of 7.1%.

On the flip side, we remain hopeful about Dean Foods’ cost productivity program, which is expected to generate additional savings in 2018 and beyond. These savings are likely to offset some negative impacts from volume declines and higher non-dairy input costs. Notably, this productivity program focuses on enhancing its supply-chain network, optimizing spending across all key categories to ensure greater efficiency and, minimize general and administrative expenses. While some savings are expected to reflect in 2018, the company anticipates increased savings in 2019 and beyond.

Additionally, the company’s OpEx 2020 cost productivity plan introduced in 2017 looks encouraging. Under this plan, the company had targeted annual productivity of $80-$100 million. Going ahead, this plan will be extended to the company’s manufacturing and logistics footprint alongside targeting reduction in SG&A expenses.

Although Dean Foods’ cost-saving efforts look appeasing, unfortunately it might be unable to offset the headwinds in the near term. So, let’s wait and see what lies in the company’s fate when it reports first-quarter 2018 results.

Zacks Model

Our proven model does not show that Dean Foods is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Dean Foods has an Earnings ESP of -7.54% and a Zacks Rank #4 (Sell), which make surprise prediction inconclusive.

As it is we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Flowers Foods, Inc. FLO has an Earnings ESP of +3.85% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hostess Brands, Inc. TWNK has an Earnings ESP of +10.87% and a Zacks Rank of 3.
 
The J. M. Smucker Company SJM has an Earnings ESP of +0.48% and a Zacks Rank #3.

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