Dean Foods (DF)

Post Number 10: Dean Foods (DF)

In Post 8 I discussed why I was bullish on milk volumes and that I was particularly looking for a turnaround in fluid milk sales. Dean Foods is the largest company in the space, and I now am long. Here is some more on the financial aspects of it.

DF has suffered majorly from the decline in milk volumes. For awhile it was overridden by their WhiteWave brands, but they were spun off three years ago. The remaining company simply had to cut costs hard, and management must be given credit for doing this. Operating expenses have fallen by over a quarter. Of course milk costs have gone down as well, but so have selling prices. Even so there is reason to be optimistic on margins. Dean has an active branding program which is showing some signs of success. The boutique milk types like flavored and lactose-free will also help here. Most important, Dean has a lot of operating leverage to volume improvement. Here's a simple spreadsheet that illustrates DF's upside to a turnaround in fluid milk consumption. I have assumed that volume grows by 1% per year and margins increase by two percentage points as the branding and specialty milk initiatives pay off. I also assume that temporary cash items like changes in receivables will be zero. They were strongly positive in 2015, which is why 2016 FCF will be down.

	Income Statement 2014-12 TTM 2016F 2017F Revenue 9503 8494 8579 8665 Cost of revenue 7830 6587 Gross profit 1673 1907 1973 2080 Gross Margin 18% 22% 23% 24% Operating expenses 1665 1851 1850 1850 Operating income 9 56 123 230 Interest Expense 61 66 66 66 Other income (expense) 0 -42 Income before taxes -52 -53 57 164 Provision for income taxes -32 -31 22 62 Net income from continuing operations -20 -21 35 101 Net income from discontinuing ops 0 -1 Other Net income -20 -22 35 101 Earnings per share, Diluted $(0.22) $(0.23) $0.38 $1.08 Shares outstanding, diluted 94 94 94 94 Free Cash Flow Calculation Net income -20 -22 35 101 Depreciation & amortization 164 175.48 175 175 Investment/asset impairment charges 21 123 130 130 Stock based compensation 12 17 20 21 Inventory 11 28 0 0 Prepaid expenses 8 10 0 0 Income taxes payable Other working capital -106 83 0 0 Other non-cash items -1 51 0 0 Net cash provided by operating activities 153 465 360 427 Investments in property, plant, and equipment, net -122 -116 -115 -115 FCF 31 349 245 312 FCF per share, diluted $0.33 $3.72 $2.61 $3.32