DF reported Q2 2013 results today with a $0.01 miss on EPS and revenue below expectations ($2.23B vs $2.25B). The company cited a challenging environment in which milk volumes appear softer than previously estimated, and flagged that Q3 volumes should be the most challenged in the year. This gives us pause on buying the stock on today’s pullback that broke its trade line of $10.98. Our quantitative levels suggest buying closer to our intermediate term TREND price level of support at $9.81.
DF milk volumes were down -6% in Q2 year-over-year (vs industry milk down -2.1%) and the company’s U.S. market share dropped to 36.4% in the quarter versus 37.8% in Q1. The company expects mid single digit declines in milk in 2013, and on the call narrowed its FY adjusted diluted EPS guidance to $0.47 to $0.53 versus a prior $0.47 to $0.55.
Despite the negative print, and subdued outlook for Q3, DF, having spun off 67% of Whitewave (WWAV) in May 2013 and reaped $589MM through the sale of its remaining stake of WWAV in July, has bolstered its financial position and is in a strong cash position should it want to make an acquisition in 2H; certainly deployment of this cash could awaken animal spirits on the long side.
The company trades at a P/E of 14.4x versus a peer average of 17.2X and EV/EBITDA of 10.6x versus 11.6x. Despite the discount to the group, we are not buyers here and now on today’s pull back.