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Dean Foods Company (NYSE:DF)

Dean Foods Company (NYSE:DF). Dan Ballantine Jason Chan Michael DeRenzo Dan Kleeman. December 3, 2013. Agenda. Introduction Macroeconomic Outlook Industry Overview Company Overview Financial Analysis Valuation Recommendation. Dean Foods Company (NYSE: DF). Company History.

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Dean Foods Company (NYSE:DF)

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  1. Dean Foods Company (NYSE:DF) Dan Ballantine Jason Chan Michael DeRenzo Dan Kleeman December 3, 2013

  2. Agenda Introduction Macroeconomic Outlook Industry Overview Company Overview Financial Analysis Valuation Recommendation

  3. Dean Foods Company (NYSE: DF) Company History • Dean Foods was founded in 1925 and is headquartered in Dallas, Texas • Global food and beverages company that specializes in dairy products • Largest processor and direct-to-store distributor of fluid milk and dairy products in the United States • Branded & private label product base includes: fluid milk, ice cream, cultured dairy products, creamers, ice cream mix, etc. • Portfolio includes more than 50 brands and private labels Dean Foods Regional Brands Source: Dean Foods Company Q3 2013 10-Q Pg. 41

  4. Macroeconomic Outlook Projected Disposable Income • Positive job growth, improved housing market, positive equity performance and lower overall savings (more positive consumer sentiment) will aid future disposable income gains • An increase in disposable income results in an increase in overall demand for dairy products from restaurants and households • Consumer preferences: shift towards “healthier” dietary habits US Disposable Income YOY Growth Source: IBISWorld Business Environment Profiles – Per Capita Disposable Income, September 2013

  5. Macroeconomic Outlook Raw Milk Prices • $21.92 per hundredweight in 2013 vs. a forecasted value of $24.50 per hundredweight in 2018 • 2008 – 2013 CAGR of 1.7% vs. 2013 – 2018 CAGR of 2.2% • Projected prices increases largely driven by increased foreign demand • WTO continues to push US to withdraw its price support for Milk • Removal of price supports will result in price volatility and potentially lower milk prices Forecasted Price of Raw Milk Source: IBISWorld Business Environment Profiles – Price of Milk, April 2013

  6. Industry Overview Dairy Products Manufacturing • Companies that manufacture dairy-based products from raw & manufactured milk and milk substitutes • US dairy products manufacturing market has about 1,100 companies with combined revenue of $107 billion annually • High degree of economies of distribution • 50 largest fluid milk producers claim 85% of annual fluid milk revenue • Industry heavily relies on direct-to-store delivery (DSD) Dairy Products Manufacturing – Product Breakdown by Revenue Source: Hoover’s – Dairy Products Manufacturing, Industry Description

  7. Industry Overview Industry Trends & Challenges • Overall industry consolidation • Acquisitions of local dairy farms and local manufacturers • Creating more efficient production and distribution networks • Continued declining milk consumption in US • Increased competition from large grocery chains Source: Hoover’s – Dairy Products Manufacturing,

  8. Industry Forces Analysis

  9. Industry Forces Analysis • Bargaining Power of Suppliers: MEDIUM • Inputs are commodities and input pricing is subject to fluctuation • Recent consolidation within dairy farming industry • Bargaining Power of Buyers: HIGH • Low-end customer perception of difference between private label and branded products makes it hard to exercise pricing power • Primarily commodity products • Threat of New Entrants: LOW • Distribution networks hard to create • Limited profitability in the long run Source: Hoover’s – Dairy Products Manufacturing, Industry Description

  10. Industry Forces Analysis • Threat of Substitutes: MEDIUM • Declining demand for milk as a product • Increased usage of traditional dairy milk substitutes • Rivalry among Competitors: HIGH • Private labels price significantly below branded products to drive customer traffic at times Source: Hoover’s – Dairy Products Manufacturing, Industry Description

  11. Company Overview Fresh Dairy Direct Segment Breakdown (Fiscal Year 2012) • Dean Foods has a very concentrated product mix (74% fluid milk) • Majority of Dean Foods sales comes from private labels Source: Dean Foods Company 2012 10-K, Pg. 5

  12. Company Overview Dean Foods Recent Company Developments • During the fiscal year of 2013 Dean Foods spun off two major business segments in order to focus on its “core business” • January 3, 2013: Dean Foods sold Morningstar division to Saputo Inc. • July 25, 2013: Dean Foods sold its final stake in WhiteWave • On November 12, 2013 announced adoption of company cash dividend policy • First dividend distribution will take place during in Q1 2014 • Quarterly dividend rate of $0.07/share ($0.28/share annually) Source: Dean Foods Company Q3 2013 10-Q

  13. Recent Financial Information Source: Dean Foods Company 2012 10-K, Dean Food Company 2010 10-K

  14. Company Strategy Change in Company Strategy • Dean Foods recently sold its two “high-growth potential” divisions and decided to solely focus on Fresh Dairy Direct • Much less dynamic business model • Focused on new successful brands like TruMoo flavored milk • Continue to cut costs across the board and expand market share • Significantly reduce the debt on the balance sheet and continue to strengthen it moving forward • Primarily focused on offsetting the weak margins within the fresh dairy business • Maximize sales, increase volume and efficient operations (cutting costs) Source: Sosland, Josh. "A New Day at Dean Foods." Food Business Week. N.p., 6 June 2013. Web. 2 Dec. 2013.

  15. Management’s Outlook • Increasing and continually volatile raw milk prices continue to impact management’s outlook moving forward • Dean Foods lost a large contract for private-label milk in early 2013 • Management expects an overall volume decline of 7% for fluid milk in 2013 • Primary focus is on its Fresh Dairy Direct division and cutting costs in order to improve its bottom line • Improve asset utilization through utilizing its national network more efficiently • Closed 7 production facilities during first three quarters of 2013 • Management expects to have closed 10 – 15% (8 – 12 facilities) of its production facilities by the middle of 2014 • Includes elimination of distribution routes and associated SG&A expenses Source: Dean Foods Company 2012 10-K, Pg. 9; Dean Foods Company Q3 2013 10-Q, Pg. 43, 44

  16. SWOT Analysis Source: Hoover’s – Dairy Products Manufacturing, Trends & Opportunities; MarketLine Advantage

  17. Current Stock Information * DF will begin paying a $0.07/share quarterly dividend in 2014, implying a current dividend yield of 1.6% Source: Capital IQ, Yahoo Finance, Dean Foods Q3 2013 Earnings Release

  18. Financial Analysis

  19. Financial Analysis

  20. Comparable Companies Source: Capital IQ

  21. Stock Performance Source: Yahoo Finance

  22. Comparable Company Analysis Source: Capital IQ

  23. Comparable Company Analysis Source: Capital IQ

  24. Discount Rate Source: Yahoo Finance

  25. Discount Rate

  26. DCF Analysis

  27. Decision Drivers • Strengths • GICS Diversification • Cost and debt reduction initiatives • Extensive and improving production and distribution networks • Renewed focus on returning cash to shareholders • Concerns • Concentrated geographic, product, and customer bases • Limited growth in core geographic market • Exited higher margin business lines in 2013 • Increasingly negative industry outlook

  28. Recommendation • Valuation Summary • Current Stock Price: $18.17 • Comparable Companies Valuation: $30.41 • DCF Valuation: $9.77 • Recommendation: WATCH LIST • Place DF on the RCMP Watch List

  29. Questions?

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