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Earnings “Beat” Puts Dean Foods Back in Play

Monday was a good day for the market, with the S&P 500 and Dow both hitting record highs.

Several beaten-down stocks were able to blast higher, as well.

Take the nation’s largest dairy processor, Dean Foods (DF)…

Shares took off after the company announced better-than-expected third-quarter earnings. And the Dallas-based food and beverage company rocketed more than 13.7% higher on heavy volume.

Is this the beginning of a continued upward trend for the small-cap stock, or just a temporary blip?

More Than Just an Earnings “Beat”

Dean Foods saw more than 10.5 million shares change hands on Monday. That’s more than a four-fold increase over the company’s 30-day average of 2.4 million shares.

As you can see in the chart below, the stock has struggled to gain traction in 2014 – showing a year-to-date loss of 4.6%, including a 23% loss of shareholder value since reaching a high of $18.15 on June 17, 2014.

Finally Catching a Break: Dean Foods (DF) Share Price YTD

But can the company sustain its growing momentum for the next several quarters?

After all, the company did announce a loss of $0.17 per share for the Q3 2014 report.

However, when adjusting for non-recurring costs – as well as for discontinued operations – the loss was only $0.03 per share. That beat Wall Street expectations of a $0.13-per-share loss.

Third-quarter revenue also showed a beat, with the company reporting third-quarter revenue of $2.37 billion against Wall Street estimates of $2.36 billion. This represents a 7.7% increase in revenue year over year.

Now, Dean’s bottom line has been hit hard by rising milk prices for more than a year now, which caused the company to lower its full-year guidance last August.

But its quarterly release suggests that raw milk prices for 2015 will fall due to oversupply in the United States and New Zealand. As a result, the company increased its Q4 2014 guidance.

This means the company now expects to earn between $0.05 and $0.15 a share for 2015.

If the company is correct in its estimates, this will accomplish much in the way of shoring up the lagging stock price – meaning its current momentum might have legs.

Attractive Valuations, to Boot

When compared to other food companies such as Mondelez (MDLZ) and ConAgra (CAG), which trade with trailing P/E ratios of 18 and 22, respectively, Dean Foods looks downright attractive.

Dean Foods’ trailing P/E is currently at 4.2 – a whopping 78.7% discount to the industry average.

Additionally, the company boasts a return on equity of more than 54.9%, while maintaining a safe current ratio of 1.60.

The company’s major weakness continues to be its poor profit margins, which sit at just 3.9%.

The hope is that these margins will materially improve in 2015, when lower milk prices finally hit the market.

But for now, shares of Dean Foods are around their median target price of $16.50, which suggests they could traverse to the stock’s upper price target of $22 per share.

This could translate to a 34.1% gain over Monday’s closing price.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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