Bernstein drops Dean Foods after poor 2018 performance

Both Q3 and Q4 of 2018 underperformed for Dean Foods, with flat sales and high operating costs. It closed facilities and reorganized its business, which caused the company to post a $326.9m income loss​ in 2018.

It decided to look into several options for the company, including “a transaction that results in private ownership or a sale of the company.”​ It hasn’t revealed a timeline, but plans on taking “vital, transformative actions to maximize the benefits of our scale and position the company for the long term.”​

Analysts at Bernstein are parting ways with Dean and said that as of March 13, its “previous reports, ratings, price targets and earnings estimates for Dean Foods should no long be relied upon.”​

It places Dean’s current net debt at about $880m and suggests the possibility that it could sell its ice cream business in the event of bankruptcy for up to $900m. Dean’s total ice cream sales were about $1bn in FY2018, so this would cover the debt with about $20m left for equity shareholders.

The liquidation value of the refrigerated trucks or ice cream plants could also provide modest value to equity shareholders, but Bernstein said that it is unclear if Dean “will be able to attract any bids at a premium with its deteriorating business fundamentals.”​

Bernstein made the decision to drop Dean based on its valuation methodology. It determined that Dean was too high-risk to its industry forecast by analyzing “changes in the degree of competitive activity within any key market, changes in the nature of our coverage companies’ relationships with their key customers and/or suppliers, fluctuations in foreign exchange rates and fluctuations in commodity costs,”​ among other factors.

Analysts said that if Class I milk prices fall, that could jeopardize its target price, or if if Dean was acquired by a retailer like Walmart, it could pose a risk to its target price.

Bernstein is in the process of downsizing; in 2018 it started relocating jobs from its New York City headquarters to Nashville, with plans to move more than 1,000 positions and the bulk of its operations. It’s keeping a scaled-down NYC office, but moving it out of Midtown to the cheaper Hudson Yards district.

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