Dean Foods Co. shares fell Thursday after a UBS analyst downgraded his rating on the company's shares, expressing concern about rising dairy prices.
THE SPARK: UBS analyst David Palmer lowered his earnings estimates for 2012 and 2013 and dropped his price target on the dairy company's shares, noting that costs are rising for both the producer and consumers.
Palmer said fluid milk prices are up 24 percent since bottoming out in the second quarter, and his firm expects prices to hit record levels by the first half of 2013. The analyst also expects that the costs for making dairy products may rise through this time period as well, putting added pressure on the Dallas-based company.
He believes market estimates for the company don't fully reflect the latest wave of dairy inflation.
THE BIG PICTURE: Dean Foods is one of the nation's largest dairy processors and milk distributors. A widespread drought in the U.S. has driven feed prices up and those types of costs often get passed along to the customer in the form of higher prices.
Companies often struggle when their costs and pricing get out of balance. Their profitability can suffer as they can only raise prices so much, or risk losing customers, to offset higher costs.
THE ANALYSIS: Palmer now expects Dean Foods to report profit of $1.21 per share for the year, down from his prior estimate of $1.26 per share. That compares with the average estimate of $1.23 per share from analysts surveyed by FactSet. Wall Street estimates range from $1.12 to $1.30.
For 2013, Palmer cut his forecast to $1.22 per share, from $1.30. The average estimate is $1.32 per share, with a range from $1.19 to $1.48, according to FactSet.
Palmer also lowered his price target to $15.50 from $17.50.
SHARE ACTION: Shares dropped 29 cents, or about 2 percent, to $14.69 at midday, after earlier dropping as much as 4.7 percent. Dean's stock has fallen about 14 percent since August, when it hit $17.50, its highest price in more than two years.