One of the leading processor and distributor of milk and other dairy products in the U.S., Dean Foods Company (DF), recently declared its intention to divest its milk processing and related businesses situated in Waukesha, Wisconsin. Dean Foods’ 170,000 square-foot milk processing facility and equipment, brands and other related assets will be included in the divestiture.

The divestment decision is a part of antitrust dispute settlement agreement between the company and the U.S. Department of Justice (DOJ) and the states of Wisconsin, Illinois and Michigan to sell Dean Foods’ plant and related businesses located in Waukesha. Apart from this, Dean Foods will be required to inform DOJ prior to making any future milk processing plants of more than $3.0 million.

In April 2009, Dean Foods bought Foremost’s consumer products division and two processing plants in Waukesha and DePere, Wisconsin, which made the company a major milk buyer in the region. Farmers have complained that less competition in the region has helped the company to hold down prices paid to the farmers. DOJ and States attorneys filed a lawsuit against the company on this matter in January 2010.

Prior to this, Dean Foods reported its adjusted earnings of 15 cents per share for the fourth quarter of 2010, which was well behind 31 cents recorded in the year-ago quarter, beating the Zacks Consensus Estimate by a penny.

Dean Foods’ quarterly net sales grew 5.5% year over year to $3,153.0 million, missing the Zacks Consensus Estimate of $3,176.0 million. The growth was primarily a pass-through of higher commodity costs at Fresh Dairy Direct-Morningstar to consumers in the form of higher prices and record top and bottom-line performance at WhiteWave-Alpro, partially offset by volume softness at Fresh Dairy Direct-Morningstar.

Based in Dallas, Texas, Dean Foods is a leading processor and distributor of milk and other dairy products in the U.S. as well as a leading manufacturer of various specialty food products. The company operates primarily on a local basis, competing mostly with local and regional operators. Dean’s largest customer Wal-Mart Stores Inc. (WMT) and its subsidiaries accounted for approximately 19% of consolidated net sales in 2010.

However, in the recent years, the retail grocery industry has experienced significant consolidation, and as a result, competition has intensified among dairy product suppliers. Dean Foods experiences stiff competition, especially at the processor level in all major product lines and geographic markets. Moreover, the company is anticipated to suffer significantly from the loss of any large regional grocery chain. Dean Foods competes not only with various dairy processors for shelf space, but also with various beverages and nutritional products. The company’s major competitors include Kraft Foods Inc. (KFT) and ConAgra Foods Inc. (CAG).

Dean Foods currently has a Zacks #3 Rank, implying a short-term ‘Hold’ rating on the stock. Besides, the company retains a long-term ‘Neutral’ recommendation on the stock.

 
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