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Shares of ConAgra Foods (NYSE:CAG) are among the prominent losers in Tuesday's trading session. The company known from household brands including Healthy Choice, PAM, Swiss Miss and Reddi-wip issued a bearish update for its first quarter and the remainder of 2014.

I don't think shares are really attractive after the recent sell-off. This is despite the earnings per share growth trajectory laid out into 2017, and the path of deleveraging. This road requires solid execution and takes year's to complete, but should result in a strong company in let's say three years time.

For now, I remain a bit cautious.

Updated Guidance

ConAgra surprised the market by providing the market with an update for the first quarter and the entire fiscal year of 2014.

Full year fiscal diluted earnings per share are now seen between $2.34 and $2.38 per share, compared to a prior target of $2.40 per share. This implies that comparable earnings per share are seen up between 8 and 10% compared to 2013.

First quarter GAAP earnings per share are seen at $0.33 per share, while adjusted earnings should come in around $0.37 per share. Challenging conditions have resulted in a softer-than-planned quarter in consumer foods. To improve falling sales quantities, ConAgra is taking steps to improve the performance.

Consumer foods, which includes meals, snacks and deserts are hurt by ultra-competitive market circumstances, caused by rivals such as General Mills (NYSE:GIS), Hormel Foods (NYSE:HRL) as well as private label brands.

Analysts were looking for adjusted earnings of $0.45 per share in the first quarter.

Note that ConAgra is scheduled to release its first quarter results on the 19th of September.

Capital Allocation

For the fiscal year of 2014 and 2015, ConAgra will focus on debt retirement, while the focus will shift towards earnings per share growth in the 2015-2017 period. Earnings growth should be driven by synergies resulting from the Ralcorp acquisition.

Valuation

ConAgra ended its fiscal year of 2013 with $183.9 million in cash and equivalents. The company operates with $9.6 billion in total debt, for a very high net debt load of $9.4 billion.

Full year revenues for 2013 came in at $15.49 billion, up 15.9% on the year before. Net income attributable to shareholders rose by 65.4% to $773.9 million.

Trading around $31.50 per share, the market values the equity in the firm at $13.3 billion. This values equity of the operations at roughly 0.85 times annual revenues and 17 times annual earnings.

ConAgra pays a quarterly dividend of $0.25 per share, for an annual dividend yield of 3.2%.

Some Historical Perspective

Long term investors in ConAgra could have realized decent returns, if they have reinvested dividend proceeds into new shares. Over the past decade, shares have traded mostly in a $15-$25 trading range before they re-tested all time highs from 1997 in their high thirties.

Shares have seen a 15% correction since the start of August, but are still trading with year to date gains of 7%.

Underlying the strong performance in recent years has been the solid growth of operations. Between 2010 and 2013, ConAgra increased its annual revenues by a cumulative 30% to $15.5 billion. Net earnings rose by 25% to $774 million in the meantime, while earnings per share growth was a bit higher as the company retired some 7% of its shares outstanding.

Investment Thesis

Investors might be overreacting a bit to ConAgra's warning for earnings in the coming year. At the midpoint of the earnings per share range, full year earnings per share are seen four cents below the company's previous guidance of earnings of $2.40 per share.

On the back of a 4 cents reduced full year earnings outlook, shares have lost over $2 in Tuesday's trading session. Yet the company has reiterated its long term outlook beyond 2014, given the opportunities it sees. Earnings per share growth is seen above 10% in the 2015-2017 period, resulting in earnings per share above $3.00 in the fiscal year of 2017.

Underlying this future growth is the acquisition of Ralcorp, which added nearly a billion in sales for the final quarter of last year and added $110 million in operating profits. The deal is now expected to result in cost-synergies of at least $300 million by the fiscal year of 2017, up from a previously estimated $225 million.

Back in November of last year, when ConAgra acquired Ralcorp, I last took a look at ConAgra's prospects. I concluded that after paying $90 per share, or $6.8 billion in total for Ralcorp, that I would remain on the sidelines.

Despite the significant synergies, I concluded to not invest in the firm given the integration risks and the increase in debt load following the deal. Yet now we are almost a year later. Ralcorp adds almost $4 billion in annual revenues, yet operating income already increases towards $400 million per annum. ConAgra has already started to de-leverage its balance sheet, and synergy estimates have been revised upwards by a third to $300 million per annum.

The target of earnings per share North of $3.00 in 2017 makes the shares look appealing based on the current valuation at 10-11 times earnings. Yet this will only be realized in three or four year's time, while ConAgra torsos along a sizable debt load in the meantime, coupled with integration risks in the meantime.

Despite the overreaction to the fourth quarter guidance, I refrain from picking up shares at this point. I might re-consider my case if shares fall to their high twenties.

For now I remain on the sidelines.

Source: ConAgra Foods - Short-Term Overreaction, Too Early For Long-Term Investment