Dean Foods: Not a Buy

Posted May 11th 2010 3:00PM by Steven Mallas
Filed under: Earnings Reports, Dean Foods (DF)

Dean Foods (DF) is down today. During afternoon trading, my screen showed the stock off 56 cents, or over 5%, to $9.91. Volume is way above normal, indicating conviction on the part of the traders. Is the sell-off a buying opportunity?

I'm not so certain about that. I'll tell you, I do not like the one-year chart. Take a look at it and see what you think. As an investor, that graphic must give you the chills. Sure, you might be wondering if Dean Foods is getting cheap; thing is, though, you have to be careful you're not attempting to catch the proverbial falling knife. That wouldn't be so good.

Back in February, Trey Thoelcke discussed an earnings miss and a not-so-hot outlook from the company after the fourth-quarter report was released. I'm afraid the numbers aren't so great this time around, either.

According to the press release posted on Monday, the dairy entity made an adjusted 23 cents per share in Q1 versus an adjusted 52 cents per share in the year-ago period. Expectations were set at 28 cents per share. Cash from operations plunged to slightly under $71 million from roughly $185 million.

This morning, our Analyst Calls piece highlighted a downgrade for the stock courtesy of UBS. The price target has been cut from $19 all the way down to $11. That hurts.

You might examine some ratios and conclude that Dean Foods is inexpensive, but I would be careful. Sure, at some point, the stock will be a buy, but I think there might be more downside to the story before that happens. Better to let the market tell you when to start a position; in other words, wait until the institutions step up and start adding the company to their portfolios. You might miss out on some gains that way, but I'd rather be safe than sorry in this particular case.

Disclosure: I don't own any company mentioned; positions can change without notice.

Tags: dairy, dean foods, DF, inthenews, milk