Shares Of Dean Foods Company Trades Higher Following Analyst Upgrade

When Dean Foods Company (NYSE: DF) reported its second quarter results on Monday, shares initially tumbled nearly ten percent as management said that it is operating in the “most difficult” environment ever.

Shares rebounded throughout Monday and Tuesday despite the thin margin of error and rising commodity cost environment the company is operating in.

Related: Dean Foods' Q2 Results Creates A Foul Taste Among Investors

Dean Foods made it clear in its quarterly results that it a recovery in commodity prices and easing of pressures is uncertain, at least in the near-term.

On the other hand, Robert Moskow of Credit Suisse believes that falling dairy prices is a possibility and is reflected in the stock's price.

“The fact that that the stock only dropped four percent on the day on unusually high trading volume suggests that investors now view the name as washed out and poised to benefit from a more favorable operating environment as commodity dairy prices fall,” Moskow wrote in a note to clients on Tuesday.

The analyst adds that he is seeing global and domestic dairy supplies increasingly rapidly while demand is easing. As such, the analyst expects commodity prices “have nowhere to go but down from here.”

Dean Foods has an attractive risk to reward balance over the next nine months as a declining commodity price environment will boost the company's margins higher. In addition, Moskow believes that Dean Foods could generate $140 million of free cash flow next year, implying a free cash flow yield of eight percent.

Shares are upgraded to Outperform from Neutral with a price target raised to $18 from a previous $15.