ConAgra (CAG, Financial) reported mixed numbers for the second quarter, with reduced earnings from last year due to write down on its store brand food segment. Both Net sales and profit were down on a year over year basis but more or less matched the consensus estimate. It’s been around two years since the acquisition of Ralcorp, but the company failed ConAgra’s CEO Gary Rodkin, who was one of the main people to head this deal.
In fact, if we look at the statistics ConAgra is the only food maker in S&P 500 index, which yielded losses to its share holders for the past two years. And now even as the company is facing such perilous times Rodkin’s decision to step down as CEO will add further pressure on the food product maker. But still the management seems to be hopeful and expects to do better in the days ahead.
Key acquisitions will power growth
In a bid to add strength to its existing business, ConAgra acquired TaiMei Potato Industry Limited, which is a potato processor based in Mongolio. This new addition will bolster its Lamb Weston potato business, which produces varieties of sweet potato, frozen potato, appetizer and other vegetable products and serves in more than hundred countries. This acquisition is also important from a geographical point of view as it will open new doors for the company in China.
Along with this Lamb Weston/Meijer, a joint venture between ConAgra Foods, Lamb Weston and Meijer Frozen Foods recently announced the expansion of its frozen potato facility in Bergen Op Zoom, Netherlands, which is expected to complete in 2016. This will give further wings to its international expansion plans.
In addition, the company will focus on those opportunities that will yield faster growth. In this regard, frozen single-serve meals is one segment were it has maintained its position in spite of the challenges it is facing. ConAgra will work hard to continue this momentum in the days ahead and improve its financials.
Private brands will be growth drivers
In private brands, the company is having a tough time with volumes down 6%, which is mainly because its customers have put a lot of business out to bid and its competitors are responding aggressively. And to top this price rise in some specific commodities is affecting its profitability. To tackle these headwinds the management is taking initiatives such as, achieving cost benefits from its network optimization. But it will be a matter of time until we see some practical impact from these initiatives. In fact, the management cites that, the Private Brands’ segment profit will be down next year as well and the recovery is expected to start only in fiscal 2016.
Going forward, ConAgra summarizes its turnaround strategy in four steps, which starts with increasing its customer responsiveness and speed. Secondly, it will improve its commercialization processes by eliminating bottlenecks, and get new products on shelf, mainly those that are expected by customers. Third, it intends to establish better services for customers with initiatives like fill rates and on-time delivery among others. And lastly it is building better connection between sales and the supply chain to optimize margin management.
Conclusion
Although the company is going through a tough time but these initiatives will strengthen its position in the days ahead. Currently it has a trailing P/E of 38.71 compared to the industry P/E of 22.27, but its forward P/E looks impressive at 15.1, which reflects further improvement in its earnings. Moreover, the stock has risen considerably in the past one year and considering the steps it intends to take in the future we could see more upside to this stock. In the light of these factors investors can consider adding this stock to their portfolio.
