ConAgra To Recover From Slump, Remains Attractive For Long-Term Investors

| About: ConAgra Brands, (CAG)

One of the leading food companies in North America, ConAgra Foods (CAG), has been struggling to deliver a healthy financial performance recently, as sales volumes are on a decline, mainly due to weak consumer spending. However, the company has been taking adequate corrective measures like cost control measures and increasing promotional spending in a bid to strengthen its financial performance. CAG can stay on track to deliver a healthy financial performance in the long term. Also, current valuations remain attractive in comparison to its peers (as shown below). I believe the stock remains a good investment option for those who are in it for the long haul.

Financial Performance
The company has been struggling to deliver a healthy financial performance in recent quarters mainly due to a weak consumer spending environment. Comparable revenues for 1Q FY2014 dropped by 1.3% YoY, primarily due to weak consumer spending. Earnings for the company also dropped in the recent quarter. Adjusted earnings came out to be $0.37 per share, representing a drop of 16% year-on-year on a comparable basis.

Sales for the company's Consumer Foods segment for the quarter came out to be nearly $2 billion, representing a decrease of 4% in organic sales. The segment's sales for the quarter were adversely affected by a 3% organic volume decrease and a 1% drop in the price mix. The segment's adjusted operating profit for the recent quarter dropped by 22% to $189 million. The segment's weak performance reflects the difficult consumer spending pattern and intense competition within the industry.

1Q FY2014 results for the company's Commercial Foods segment remained slightly better than the Consumer Foods segment. Commercial Foods' sales for the quarter were $1.26 billion, in line with the segment's 1Q FY2013 sales. Despite flat sales for the quarter, the segment's operating profit dropped by 7% year-on-year. CAG has been going through the formation of Ardent Mills to enhance its milling operations. The transaction is expected to close in 4Q CY2013.

CAG purchased Ralcorp, the private label foods manufacturer, for $5 billion last year. Ralcorp operations are expected to contribute an EPS of $0.25 toward the company's total EPS in the ongoing fiscal year (FY2014). In 1Q FY2014, Ralcorp's operations contributed $942 million toward the company's total revenues and $83 million toward its total operating profit.

CAG operates in an industry that faces intense competition. As consumer spending patterns remain weak, companies are pushing hard on advertisement and promotional activities to grow their sales. CAG has been focusing more on advertisement initiatives to pass through the tough environment. The company increased its advertisement spending by 30% and 14% in FY2013 and 1Q FY2014, respectively. Lately, the company signaled that it will now be focusing on more promotional activities moving forward in order to grow its sales volume. I believe CAG's plan to focus more on promotional activity will have a positive impact on the sales volume. However, it will add pressure to the company's margins, which are already dropping due to weak consumer spending and intense competition. The following table shows margins for the company.

1Q FY2013

1Q FY 2014

Gross Margin (Total)

22.5%

20.3%

Operating Margin (Total)

9.3%

7.9%

Net Margin (Total)

5.5%

4%

Operating Margin (Consumer Foods Segment)

12%

9.5%

Operating Margin (Commercial Foods Segment)

11%

10.3%

Click to enlarge

Source: Company Reports and Calculations

Stock Price Catalysts
As consumer spending strengthens and input cost inflation is expected to moderate in CY2014, I believe that the sales volume for CAG and the industry will improve, which will have a positive impact on the stock price. Also the company is signaling that it will ramp-up its promotional activities which will help the company support/grow its decreasing sales volume. Also, the company has been working on SG&A cost savings measures, which will fuel earnings growth and remain an important performance driver in the near term. In the recent quarter, the SG&A as a percentage of sales dropped by 90bps year-on-year to 12.4%.

Risks
Intense competition, the growing popularity of private label brands and ongoing weak consumer spending patterns remain a threat to the company's future financial performance. Also, the company faces a challenge, as retailers cut the distribution of branded goods in favor of private label brands. CAG has to effectively push hard on its promotional activities to persuade retailers to favor CAG products over private label brands and other competitors; however, this could add additional pressure on CAG's margins.

Conclusion
CAG's shares are down nearly 12% in the last one month and the stock can experience some more underperformance in the near term due to weak sales volume. However, I believe the company has been taking the right steps, including pushing hard on advertisement and promotional spending and cost control efforts, to navigate through these difficult times. The company can stay on track to post a solid performance in the long term and maintain its dominant position within the industry. Analysts have projected a healthy next five-year growth rate of 10% for CAG. Also, the recent pullback in the stock price offers a good entry point for long-term investors. Moreover, current valuations look compelling for CAG. Therefore, I recommend long-term investors buy the stock.

Forward P/E

PEG

Price/Sales

CAG

12x

1.3

0.8x

General Mills (NYSE:GIS)

15.5x

2.15

1.7x

Kraft Foods (KRFT)

17x

3

1.75x

Click to enlarge

Source: Yahoo finance

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.