Analyst initiates Dean Foods coverage at 'Sell'

MILWAUKEE - Lazard Capital Markets initiated coverage of Dean Foods Co. with a "Sell" rating Thursday, saying the milk and dairy products distributor has limited growth opportunities in the long term as Americans consume less fluid milk.

Analyst Jacklyn S. Rider said Dean's primary growth drivers are inflation, cost cutting and debt paydown, not sales. Rider also said the Dallas-based company, the nation's biggest milk producer, would see margin pressure amid "the current trend among beleaguered consumers to trade down to private label brands."

Analysts agree that consumers, hurting given the volatile stock market and rising costs, may be trading down to less expensive, off-brand products.

Rider said she did not believe Dean would generate much sales growth in the long term, and it would also be hurt by high milk prices and competition in the organic business.

"Given those dynamics, we believe the potential downside to expectations exceeds the potential upside," she wrote in a note to clients.

On Tuesday, Dean said its third-quarter profit rose sharply, helped by lower interest expenses, but the results were below analyst expectations, partly due to high commodity costs.

The company said it expects commodity costs to ease in the fourth quarter and reaffirmed its full-year guidance of $1.20 a share, excluding one-time items. Analysts polled by Thomson Reuters, on average, predict a profit of $1.24 per share.

Shares of Dean fell 9 cents to $16.94 in morning trading.

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