Deutsche Bank: Dean Foods Continues To See Dairy Troubles

Dean Foods' DF continuing problems in dairy are once again bringing leverage issues to bear on the equity and more than offsetting solid trends in the branded WW segment. While mgmt. is lowering cost and fighting for milk share, no short-term fix seems possible. Deutsche Bank lowers its estimates, PT to $9 and retains a cautious approach. Operating EPS of $0.13 was well below our $0.20 est. While sales increased 10%, volume weakness across the FDD segment and negative mix shift as well as higher butterfat cost resulted in a 35% drop in EBIT. Thus EBIT margins collapsed to 3.4% vs. 5.7% a year ago. With WW branded results and cost savings insufficient to offset milk category pressure, DB lowers its 2010 and 2011 EPS to $0.79 and $0.85, respectively. A lack of improvement in the landscape once again brings debt covenants into play and likely keeps pressure on the equity. The loss of CFO Callahan doesn't help. DF closed Monday at $7.60