America's Biggest Milk Processor Is Trading Under a Buck

(Bloomberg) -- The biggest U.S. milk processor is now a penny stock.

On Tuesday, Dean Foods Co. shares closed at less than $1 for the first time since they started trading more than two decades ago. The destruction of market value, which has whittled down to about $90 million, is as simple to explain as it is dramatic: Americans aren’t drinking as much milk.

Amid fierce competition to supply grocery stores’ own brands, Dean’s margins are razor thin -- averaging about 3.8% over the past five years. The company’s situation deteriorated further after Walmart Inc., a key customer, built its own milk processing plant last year.

While the Dallas-based company is looking to sell assets, much of the interest is in possible debt restructuring. Its bonds have been trading at distressed levels, and that’s led its equity to trade at “nuisance” levels, said Hoai Ngo, senior credit analyst at Bloomberg Intelligence. In other words, the way bonds are trading, there wouldn’t be enough value left in a bankruptcy proceeding to pay equity shareholders.

Dean declined to comment, referring to previously stated expectations of generating positive cash flow in 2019 and securing additional liquidity by the end of the second quarter. In its first-quarter earnings call, the company said it refinanced its “debt capital structure in February, which provides us with the resources necessary to drive our commercial agenda and execute our enterprise-wide cost productivity plan.”

Stocks that trade below $1 on the New York Stock Exchange for too long also run the risk of being delisted, said Jennifer Bartashus, an analyst for Bloomberg Intelligence. That can be a cause of concern to investors and make it difficult for the company to bring its share price back up, she said.

“In bankruptcy proceedings, all the classes of shareholders have a right to say ‘I deserve something,”’ Ngo said. For equity shareholders, though, “they’ll just give them a little something to go away.”

That may help explain why the shares keep falling even as Dean’s bonds have recovered a little ground in the past month. The notes due 2023 are trading at 58 cents on the dollar, up from a low of 51 cents. Still, at a 24 percent yield, the bonds are well into distressed levels.

To contact the reporters on this story: Lydia Mulvany in Chicago at lmulvany2@bloomberg.net;Katherine Doherty in New York at kdoherty23@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Millie Munshi

©2019 Bloomberg L.P.