ConAgra released its second quarter earnings of 2013 on 20th December, 2012, and this is what the company CEO has to say:
"Gary Rodkin, ConAgra Foods' chief executive officer, said, "We are pleased that both of our segments posted operating profit growth in the midst of current economic conditions. Effective margin management initiatives, moderating input cost inflation, the benefit of acquisitions, and good results from our potato operations are collectively driving high-quality EPS growth. We are very excited about the pending acquisition of Ralcorp, which we announced on Nov. 27, 2012, given the strategically and financially compelling nature of the acquisition. The acquisition is expected to close in the first quarter of calendar 2013, and we look forward to updating our investors on the financial benefits of the acquisition in due course."
Here are the few important highlights from the Q2FY2013 results:
Sales revenue has gone up 7.8% to $7.05 billion in Q2FY2013, as compared to $6.54 billion in Q2FY12. Sales revenue in the consumer foods segment is up 9.7% to $4.47 billion and sales revenue in the commercial foods segment is up 4.6% to $2.58 billion. Needless to say, the business segment that occupies around 63% of the year-to-date sales revenue is definitely showing upward momentum, even in a slow economy.
Yet as a matter of fact, ConAgra sold 4% fewer products, which include Hunt's ketchup, Peter Pan peanut butter and Orville Redenbacher's popcorn, while prices were up around 4%. But then again, it is in direct contrast with General Mills (GIS) that claimed to have sold more items in US for the first time in two years.
This is what is written on the ConAgra Foods Group (CAG) website:
"ConAgra Foods' consumer brands can be found in 97 percent of America's households, and 28 of them are ranked first or second in their category. Why? Because we're invested in making great food and in being a strong partner to our customers."
That sounds promising. According to WikiInvest, "ConAgra has less market share then Kraft, more than Hormel Foods, and about the same as General Mills."
Even when both the companies in question have the same market share, ConAgra doesn't seem to be efficiently capitalizing on it and lagging behind General Mills nonetheless. Needless to say, there is something wrong with the business strategy of ConAgra.
Operating profit of $455.3 million grew 9.2% over $417.1 million in the year-ago period, as reported. This was an after-effect of the acquisitions, which improved consumer foods segment's operating profit by 11.6% compared to the year-ago period. Operating profit grew, but that doesn't prove anything unless it results in substantial return on equity.
Capital expenditures from continuing operations for property, plant and equipment went up to $82 million, compared with $65 million in the year-ago period. Capital expenditures probably include fixing of the new acquisitions, but these expenses are offset by the income or the potential of future income that they bring to the table. Equity method investment income were $13 million for the fiscal second quarter, slightly above $12 million in the year-ago period while the company recorded $16 million of net hedging loss in the current quarter, and $27 million of net hedging loss in the year-ago period. It seems to me that ConAgra Foods is gradually creating an all-round regional sales portfolio, which will bring higher revenue and smoothen out occasional ups and downs over the coming few years.
You can add another acquisition to the list - Ralcorp Holdings, which is supposed to reflect in the Q3FY2013. Ralcorp's total annual revenue is recorded at approximately $4.3 billion, which also includes a branded and commercial / foodservice portfolio. It will also position ConAgra Foods as the largest private label packaged food business in North America, with combined private label sales of approximately $4.5 billion. It will most likely achieve approximately $225 million of cost synergies on an annual basis by the fourth full fiscal year after the closing of the transaction in March, 2013. Nevertheless, that will add a few hundred million to the bottom line as well.
According to industry analysts, private label sales now represents 18% of sales in the packaged food market in the U.S. and has consistently demonstrated growth in excess of the overall food market over time. With the acquisition of National Pretzel Company and part of Agro Tech Foods in November 2011, Del Monte Canada in March 2012, Kangaroo Brands' in May 2012, Bertolli and P.F. Chang's Home Menu frozen meals businesses from Unilever PLC in August 2012 and now the Ralcorp Holding following in the line, ConAgra seems to entrenching its strong position in the private label industry. That pretty much creates value for the company, but we, as investors, are not only interested in value but also in the valuation of stocks.
Let's take a look at the comparative stats now:
Total Debt-to-Equity Ratio
Return on Equity (ROE)
Mondelez Intl. (MDLZ)
Average ROE, lower gross margin and even lower operating margin. It indicates that the company management is in the wrong hands and that capital is not being properly utilized as should be.
Higher current ratio and lower debt-to-equity percentage. The above statement can be reiterated once again. Money is sitting idly as current assets, and since there is not much pressure to return money back to banks or any financial institution, it is resulting to lower return on shareholder's equity.
Beta of less than 1 still show that the stock is pretty safe compared to the market, which might lead us to think that this might be one of those dividend stocks. But with dividend per share (DPS) of 0.25, far below 0.33 of General Mills and 0.44 of Kellogg Company (K), that reason doesn't work here.
Diminished margins, lower dividend payment and above-average beta does not convince me that ConAgra can be a good value stock to buy at the moment. Gary M. Rodkin needs to buckle up and create some serious corporate synergy with the string of acquisitions done or to be done this year and onward.
Needless to say, a few more quarters ahead (or, let's say FY2014) might be a crucial time to take a decision on the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Equity investing is subject to market risks. Please think twice before you act.