Got milk stocks? Profiting from dairy price drop

Published Tue, Jan 27 20158:35 AM EST

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Sustained declines in dairy prices are lowering costs on cheesecake and chocolate bars, increasing profit margins and raising analyst ratings on related stocks. Investment banking and asset management firm William Blair upgraded Cheesecake Factory on Jan. 20 and raised its fourth-quarter earnings-per-share estimate by 2 cents, citing falling milk prices. "We expect both better-than-expected sales and lower dairy prices to contribute roughly equally to the earnings upside," Blair's Sharon Zackfia said. "Given the early stage of the year, we expect most companies to reiterate 2015 guidance, although we see the potential for The Cheesecake Factory to narrow or raise guidance given falling dairy prices (which could benefit 2015 earnings per share by $0.03 to $0.04)." On Jan. 16, Wells Fargo upgraded Hershey Company to "outperform," noting that July's 8-plus percent U.S. price increase was timely. In subsequent months, milk powder prices have declined by 40 percent, international sugar prices are negative 13 percent, and cocoa inflation has flattened. Class III milk futures are down more than 35 percent since September and are expected to decline further, according to analysts. "Dairy prices are declining due to increased production both in the U.S. and in the international markets, in part facilitated by lower grain and improved weather," said Farha Aslam, managing director of food and agribusinesses at Stephens. "We expect dairy prices to moderate into the summer months, from $16.10/100 weight to $14.70/100 weight in June," she said. Read More Milk is now cheaper than water in the UK She highlighted beneficiaries as J.M. Smucker , which has a canned milk business, and Dean Foods , which produces milk. KeyBanc Capital Markets also reiterated its "buy" rating on Dean Foods in a Jan. 16 overview of the packaged food and meat industry. Analyst Akshay Jagdale's base and bull case for the stock noted benefits from "continued milk category volume declines of negative 1 to 2 percent per year in both full-year 2015 and full-year 2016 with Dean Foods maintaining its market share." The analyst's note is calling for a "rebound in profitability mainly as a result of significantly lower raw milk costs and, to a lesser extent, lower plant costs." Of these companies, Hershey had the highest median return in the quarter following a decline in milk prices, according to historical analysis by Kensho, a quantitative data analytics tool. Hershey Foods traded positive 90 percent of the time and had a median return of 8.79 percent. Dean Foods traded in the green 70 percent of the time and had a median return of 6.40 percent. J.M. Smucker had positive trades 86 percent of the time for 7 occasions and had a median return of 5.29 percent. The Cheesecake Factory traded in the green 60 percent of the time and had a median return of 5.28 percent. The Kensho study looked at stock performance for the three months following a 20 percent or more decline in CME Class III milk futures over a 60 trading day period on seven or more instances since Jan. 1, 1980. CNBC's parent NBCUniversal is a minority investor in Kensho.

Reese's Peanut Butter Chocolate Cake Cheesecake at the Cheesecake Factory.

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Sustained declines in dairy prices are lowering costs on cheesecake and chocolate bars, increasing profit margins and raising analyst ratings on related stocks.

Investment banking and asset management firm William Blair upgraded Cheesecake Factory on Jan. 20 and raised its fourth-quarter earnings-per-share estimate by 2 cents, citing falling milk prices.