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Do Not Miss ConAgra on the pullback!

August 01, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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ConAgra Foods, Inc. (CAG) - operates as a food company primarily in North America. The company operates through two segments, Consumer Foods and Commercial Foods. The Consumer Foods segment provides branded, private label, and customized food products in various categories, such as meals, snacks, desserts, breakfast products etc. The Commercial Foods segment offers commercially branded foods and ingredients that are sold primarily to foodservice, food manufacturing, and industrial customers. In the fourth quarter of 2014, the company’s performance took a hit because of the weakness in some categories and private label pricing discounts. Let us analyze if the stock is still a buy after an earnings beat.

Disappointing results

In the fourth quarter of 2014, the pressure on ConAgra’s topline was visible as the company reported a decline of approximately 2.8% year-over-year. The bottomline was also affected negatively because of the pressure on revenue as the company reported a loss of $324.2 million or 77 cents per share as compared to a profit of approximately $192.2 million or 46 cents a share. As I mentioned above, the private segment has been faring badly since a last few quarters and the company expects to be in this state for several years, the main reason it lowered the EPS outlook for fiscal 2015 to 2017. Another disappointing highlight of the call was the performance of the consumer foods segment, which reported a decline of approximately 7% in sales. This decline was worse than ConAgra’s initial expectation of around 3% to 4% decline.

A look at the core business segments

Continuing the discussion on the consumer foods segment, it contributes approximately 40% to the overall revenue of the company and hence, is a highly significant segment for the company. As such, ConAgra is investing credible efforts in order to boost certain brands comprising this segment especially Healthy Choice, Chef Boyardee and Redenbacher. It is working on the product mix for the Healthy Choice brand because of which it is moving to its proprietary Cafe Streamers offerings and discontinuing a number of other Healthy Choice slow-moving SKUs. Cafe Steamers is a truly differentiated product line and has considerable margins, making it a healthy product not only for the consumers but also for the company. Similarly, the company is taking certain specific initiatives with respect to the other two brands and if it can sustainably implement these changes then the consumer foods segment could see better growth in the coming quarters.

Last year, after ConAgra acquired Ralcorp, the largest private label food manufacturer in the U.S, the expectations of investors and analysts went sky high. However, the performance of company’s private brand segment was not particularly encouraging in this quarter.The profitability of the private brand segment remains weak since the acquisition of Ralcorp Holdings. Although ConAgra became the biggest U.S. private label food company with the Ralcorp acquisition, the last year's pricing concessions offered by the company to protect the customer losses at Ralcorp, and the higher-than-anticipated operational cost faced due to challenges offered by the Ralcorp integration contracted the margins of the private brand segment, which I believe is a short-term concern and will improve in the long term due to better integration efforts.

A cheap valuation is the clincher

I believe that the point that I am trying to drive home is amply clear. The fact that ConAgra reported disappointing results with a gloomy outlook definitely puts off potential and existing investors. However, the best reason to invest in ConAgra at this point in time is its cheap valuation. Trading at a discount of approximately 19% to its 52-week high, the ConAgra stock has a forward P/E of around 13 as compared to industry average of around 19. As per data, ConAgra shares are now trading below the 50 and 200-day moving averages, which are both just over $31 per share indicating that a short term gain might be on the cards

Takeaway

Despite the recent quarter’s disappointing results, ConAgra represents a valuable buy because of its attractive valuation and continuing dominance in the private label food business. Also, the company will pick up in the long run because of the product portfolio initiatives it is planning to undertake in its consumer foods segment. ConAgra deserves a place in your diversified portfolio.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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