Dean Foods Company (DF)

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See all Bulls Reasons Bulls: Reasons To Buy "USDA sees bulk milk prices heading down, which will benefit Dean" 0% agree "USDA sees bulk milk prices heading down, which will benefit Dean" Fluid milk prices are headed down according to the USDA (2-22-08). While this is not good for farmers, it is very good news for dairy processors like DF. They have been squeezed tremendously over the past few months by very high dairy prices they had to pay farmers. Now... read more View or Edit Reason 0 votes 0% agree USDA sees bulk milk prices heading down, which will benefit Dean 0% agree USDA sees bulk milk prices heading down, which will benefit Dean Fluid milk prices are headed down according to the USDA (2-22-08). While this is not good for farmers, it is very good news for dairy processors like DF. They have been squeezed tremendously over the past few months by very high dairy prices they had to pay farmers. Now... read more View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell The P/E of 20x management’s guidance is above the company’s five-year average of 17.5x. 0% agree The P/E of 20x management’s guidance is above the company’s five-year average of 17.5x. The P/E of 20x management’s guidance is above the company’s five-year average of 17.5x. View or Edit Reason 0 votes 0% agree High P/E ratio 0% agree High P/E ratio The P/E of 20x management’s guidance is above the company’s five-year average of 17.5x. View or Edit Reason 0 votes 0% agree Consensus growth rate is far too optimistic 0% agree Consensus growth rate is far too optimistic The consensus five-year growth rate of 11.5% also seems incredibly optimistic, given that the same analysts are expecting a 5% sales increase this year to be followed by a modest decline next year. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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One trend that has helped boost the company's fortunes in the face of increased dairy prices has been its WhiteWave Foods group, which focuses on organic dairy and soy products. In 2006, this division accounted for about 12% of sales and grew over 6% compared to 2005; the traditional Dairy group saw sales fall by about 2% during that same time.

[edit] Business Financials

[edit] Business Model

Dean Foods manufactures and distributes dairy food products to retailers, distributors, foodservice outlets, schools and governmental entities across the United States. Both the Dairy Group and WhiteWave Foods are heavily dependent on its main customer, Wal-Mart Stores (WMT), which accounted for 18.2% of the Dairy Group’s 2006 net sales and 14.3% of WhiteWave Food’s.^[1]

[edit] Business Units

The Dairy Group brought in approximately 87% of consolidated net sales in 2006 (about $8.82 billion)^[2] and is Dean’s steady source of income. WhiteWave Foods Company brought in a smaller $1.28 billion^[3] but has been growing at a much faster rate due to its focus on consumer demand for organic and soy foods.

Both the Dairy Group and WhiteWave Foods use Dean’s extensive direct store delivery system, or DSD, which transports products from processing facility to customers’ stores via refrigerated trucks. Dean’s ownership of such an expansive DSD system has made it the only national dairy beverage company in the U.S.

[edit] Financials

In the face of slightly decreased sales from 2005 to 2006, Dean lowered their cost of sales to create a net 0.7% increase in total operating income to $650.4 million in 2006. This was mainly due to an emphasis on increasing efficiency of production on Dean's part and a lower price of milk. For the past three years, cost of sales has steadily decreased while net sales and total operating expenses have stayed flat, resulting in a slow increase in total operating income.

While net sales for the Dairy Group has been flat from 2004-2006, WhiteWave Food has seen substantial growth in sales due to the increased popularity of healthful organic foods. Its sales grew 6.4% in 2006 and 15.2% in 2005.

[edit] Key Trends and Forces

• Heavy dependence on Dairy Prices (US): In 2008, the USDA has forecast milk prices to be in the range of $18.00 to $18.80 per CWT (hundred pounds). ^[6] The minimum price of raw milk is regulated in most parts of the country by the government at $9.90, but ever since Cooperatives Working Together (CWT), a dairy farmers group, put into place initiatives in 2002 to control milk supply by retiring herds, milk price have shot up (see chart). ^[7] Since raw milk is the primary raw material used by Dean’s Dairy Group, this increase in prices has hurt the company's profitability, especially since per capita demand for milk products in the U.S. has decreased and total demand for milk products has stayed constant. Increasing milk prices increases Dean’s cost of sale and cuts into their total operating income. The Dairy Group generally increases or decreases the prices of its fluid dairy products on a monthly basis in correlation to fluctuations in the costs of raw materials.

• The rise of Natural & Organic Foods Consumption : Because of the increasing popularity of natural and organic foods, WhiteWave Foods has been Dean's source of growth the past few years. Especially in the organic milk market, demand rose dramatically in 2007 due to a large increase in the supply of organic milk, which is a double-edged sword for Dean.
  • On one hand, limited organic milk availability in the past had resulted in WhiteWave's inability to meet consumer demand since cows take three years to be converted from regular to organic cows. Lowering organic milk prices will also cause prices to converge with higher regular milk prices, increasing demand for organic milk products.
  • However, the Department of Agricultures’s organic policy changed for one year in 2007, allowing cows fed on 80% organic feed and 20% conventional to be deemed organic (differing from its usual requirement of 100% organic feed), which increased the organic milk supply by as much as 70% (compared to its typical 20% growth). ^[9] This has led Dean to revise its earnings forecast downwards as it must lower prices due to the over-supply of organic milk in order to keep its leading market share.

• Rising petroleum prices: Dean delivers most of its products through its extensive Direct Store Delivery system, and higher diesel fuel prices increases delivery costs. In addition, the Dairy Group's secondary raw material after milk is resin, a petroleum-based product used to produce plastic bottles, and an increases in petroleum prices will affect resin prices as well.

[edit] Competition

Although Dean Foods is the largest producer and distributor of dairy products in the United States, it face main competition from larger companies like Kraft Foods (KFT), Nestle, Dairy Farmer of America(DFA) and Groupe Danone (DA), many of which produce a variety of food and beverage products.

Kraft Foods (KFT) only derives 55% of its sales from dairy and 27% from beverages, and Nestle competes with Dean only in the coffee creamer and milkshake businesses in addition to having a small market share in the U.S.

 Dean Foods Company

	Select All  |  Select None Metrics Revenue by Geography - International Revenue by Geography - Europe Revenue by Geography - Asia Revenue by Geography - Latin America Operating Income Revenue from Retailers Revenue from Organic Products Gross Profit Revenue Revenue by Geography - United States Net Income Revenue from Milk Revenue from Soy-Based Products Revenue from Non-Dairy Products Dairy Products Volume Cancel

	Select All  |  Select None Companies Dean Foods Company (DF) Lifeway Foods (LWAY) Synutra International (SYUT) Tofutti Brands (TOF) WIMM BILL DANN FOODS OJSC (WBD) American Dairy Incorporated (ADY) Cancel

Choose View:20042005200620072008Most Recent

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2005 Data

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Company	Data From	Net Income	Revenue from Non-Dairy Products	Revenue	Revenue from Milk	Dairy Products Volume	Revenue by Geography - United States	Revenue from Soy-Based Products
American Dairy Incorporated (ADY)	2006	$19.9M[11]	Add	$123M[11]	79%[12]	29.1M[12]	Add	Add
Dean Foods Company (DF)	2007	$131M[13]	Add	$11.8B[13]	55%[14]	Add	$11.8B[13]	0%[14]
Lifeway Foods (LWAY)	2007	$3.15M[15]	Add	$38.7M[15]	Add	Add	Add	Add
WIMM BILL DANN FOODS OJSC (WBD)	2007	$140M[16]	Add	$2.44B[16]	76%[17]	1.6M[17]	Add	Add

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See all Dairy Products Industry WikiData

[edit] Organic Dairy Market Share

Deans' products had a dominant shares of the milk and soy drink markets as of 2006; Silk brand had captured 70% of the soy milk market and Horizon Organic had 60% market share in the organic milk sector. As more beverage companies with bigger budgets move in to compete, Dean must formulate new marketing and product development strategies to counteract the competition.

[edit] References

1. ↑ Dean Foods(DF) Form 10-K, Fiscal year 2006, "Business", p. 2,4.
2. ↑ Dean Foods(DF) Form 10-K, Fiscal year 2006, "Business", p. 1.
3. ↑ Dean Foods(DF) Form 10-K, Fiscal year 2006, "Business", p. 3.
4. ↑ Dean Foods(DF) Form 10-K, Fiscal year 2006, "Selected Financial Data", p. 24.
5. ↑ Dean Foods(DF) Form 10-K, Fiscal year 2006, "Selected Financial Data", p. 24,28.
6. ↑ Heller, Lorraine. "USDA predicts more commodity price rises." Food Navigator USA. Dec. 13,2007 <http://www.foodnavigator-usa.com/news/ng.asp?n=82052-corn-wheat-soybean>.
7. ↑ "What is CWT?" <http://www.cwt.coop/about/about_index.html>.
8. ↑ "What is CWT?" <http://www.cwt.coop/about/about_index.html>.
9. ↑ Cox, Jeff. "Organic milk price war." CNN Money, Jun 25, 2007 <www.cnnmoney.com>.
10. ↑ Only includes North American data
11. ↑ ^{11.0 11.1} ADY,2006,10-K,Item-15,Page-F-4
12. ↑ ^{12.0 12.1} ADY,2006,10-K,Item-1,Page-6
13. ↑ ^{13.0 13.1 13.2} DF,2007,10-K,Item-6,Page-21
14. ↑ ^{14.0 14.1} DF,2007,10-K,Item-1,Page-1-10
15. ↑ ^{15.0 15.1} LWAY,2007,AR,Item-7,Page-20
16. ↑ ^{16.0 16.1} WBD,2007,20-F,Item-3,Page-5
17. ↑ ^{17.0 17.1} WBD,2007,20-F,Item-7,Page-48