UPDATE 2-Dean Foods forecasts profit below views, shrs fall

(Recasts, adds company and analyst comments)

CHICAGO, Aug 6 (Reuters) - Dean Foods Co (DF.N), the largest U.S. dairy company, forecast third-quarter and full-year earnings below estimates on Wednesday, as cost increases and stiff competition weighed on its Horizon Organic milk business.

Dean shares fell as much as 14 percent after it issued the outlook, even though third-quarter profit came in just above estimates.

Horizon has been hit by higher organic milk costs, and the company has spent more on marketing as competition in the organic milk business increased.

Dean is "standing by its initial strategy of maintaining or growing market share in the near-term even if it means temporarily eroding profitability in the segment," Wachovia analyst Jonathan Feeney said in a research note.

The company said it was disappointed that improvement in the Horizon business was taking longer than expected.

"It is unclear when a recovery to profitability will occur in the Horizon brand," Gregg Engles, the chief executive, said during a conference call with analysts.

Second-quarter profit rose to $48.9 million, or 31 cents a share, from $28.4 million, or 21 cents a share, a year earlier.

Excluding a charge for facility closings, profit was 33 cents a share. On that basis, analysts, on average, expected 32 cents, according to Reuters Estimates.

Sales increased 9 percent to $3.10 billion as the company passed on higher dairy costs to its customers.

For the year, Dean stood by its earnings forecast of at least $1.20 per share before special items. It looks for third-quarter earnings of 26 cents to 31 cents a share before items.

Analysts, on average, expect 32 cents a share for the third quarter and $1.27 a share for the year.

Dean shares dropped $2.65 at $20.69 on the New York Stock Exchange. It fell as low as $20.16. (Reporting by Brad Dorfman and Sarah Coffey; editing by John Wallace/Jeffrey Benkoe)