Expected Synergies And Customer-Oriented Policies Earn ConAgra A Bullish Rating

| About: ConAgra Brands, (CAG)

Summary

Company’s private segment helps ensure improving YoY total net sales and underlining margins trend.

Future synergies from Ralcorp acquisition to benefit CAG.

Company working on satisfying customers through price concessions and in-store initiatives.

ConAgra Foods (NYSE:CAG) is among the promising companies in the North American Consumer Staple Industry. I maintain my "bullish" stance on CAG. The company has been delivering a satisfactory financial performance recently. In 3QFY14, CAG witnessed a 14% YoY increase in revenue and a 3.5% YoY increase in underlining operating profits. The segmental base did face challenges from two of its main segments. The consumer and commercial segment observed a drop in volumes and net sales caused by thinning of margins, but expected growth initiatives and improved crop utility in upcoming quarters will support the segment's performance in the future. The private segment has been experiencing positive results, supporting CAG's overall net sales base in 3QFY14. The private segment went for price concessions to retain customers, which narrowed its margins. Also, synergies from the Ralcorp acquisition will back the private segment's revenues and underlining margins growth in the near future. The stock also remains an attractive investment option for dividend-seeking investors as it offers a safe dividend yield of 3.20%.

A mixed session from the three main segments

CAG has three main segments, namely consumer, commercial and private. The consumer segment has the highest contribution of 43% toward the company's net sales. Net sales contributions by each segment for the third quarter are shown by the pie chart below.
Click to enlarge
Source: Company's Quarterly Earnings Report

CAG has delivered satisfactory consolidated financial performance in the recent past, but the results of two of its important segments, consumer and commercial, were slightly weak in 3QFY14. The consumer segment being the major contributor toward net sales in 3QFY14 faced challenges in its brands, including Healthy Choice, Chef Boyardee and Redenbacher. With low volumes and net sales, the consumer segment reported relatively flat margins YoY for 3QFY14. Moreover, currency movements adversely affected the sales of the consumer segment. However, I believe FY2015 will come up with relatively improved results for the consumer segment as the company's marketing campaigns will improve sales from brands by getting back their lost shelve spaces.

The following table shows the changes in volumes and net sales of the consumer segment.

2Q-FY14

3Q-FY14

Volume (Y-O-Y Change)

0%

(3%)

Net Sales (Y-O-Y Change)

(0.37%)

(4%)

Operating Margins (Y-O-Y Change)

11%

0.38%

Click to enlarge

Source: Form 10-Q

Moreover, the commercial segment's volumes and net sales were also pressured in 3QFY14, with a recent trend of consumers and grocers shifting from commercial to private branded products. The customer mix shift and the low potato crop utility burdened CAG's commercial segment's margins. I believe CAG will end FY14 on a positive note, yielding improved results from the commercial segment as the potato crop is expected to improve in upcoming quarters.

The following table shows the changes in volumes, net sales and operating profit margins for the commercial segment.

2Q-FY14

3Q-FY14

Volume (Y-O-Y Change)

0%

1%

Net Sales (Y-O-Y Change)

3.1%

(0.7%)

Operating Margins (Y-O-Y Change)

(15%)

(13%)

Click to enlarge

Source: Form 10-Q
CAG's private brand segment continues to stay positive in net sales and underlining margins in comparison with other segments, supporting the overall net sales base in 3QFY14. However, to address competition in the segment, price cuts being adopted by the company in the private segment caused QoQ thinning of margins. But the private segment still holds high hopes for CAG as synergies of the Ralcorp business acquisition still need to be realized.

The following table shows YoY change in volumes, net sales and operating margins for the private brand segment.

2Q-FY14

3Q-FY14

Volume (Y-O-Y Change)

(4%)

(4%)

Net Sales (Y-O-Y Change)

84%

60%

Click to enlarge

Source: Form 10-Q

Ralcorp Synergies

The Ralcorp acquisition supported CAG's income base quite well. The net income for 3QFY14 almost doubled with acquisition benefits strongly supporting the private segment. The company has a rich pipeline of synergies from the Ralcorp business acquisition. The company expects $300 million of annual pretax cost-related synergies from CAG by the end of 2017. So I believe going forward, as the synergies from Ralcorp are realized, the company is going to witness an increase in its private brand segment's results and a sure increase in earnings, which will portend well for EPS growth.

Dividends and Balance Sheet

The company offers an attractive and sustainable dividend yield of 3.2%. CAG has increased its dividends by 7.40% in the last five years, which are strongly supported by the cash flow base. The company has been paying strong dividends for quite some time and is all geared up to do so in the near future, as mentioned by the CFO in the recent earnings release Q/A session:

"We are committed to a strong dividend. And finally, as we make progress on strengthening our balance sheet and credit metrics over time, we do expect to have more flexibility to increase the portion of free cash flow, allocate it to dividends, share repurchase and earnings growth."

The following chart shows how CAG's dividend yield is well positioned among its peers.
Click to enlargeSource: Yahoo Finance (CAG, General Mills (NYSE:GIS), Kellogg (NYSE:K), Johnson & Johnson (NYSE:JNJ))

CAG, with its debt-to-equity ratio of 1.69x, stands out with a balance sheet much more attractive than peers, but still it needs to lower its debt to improve its risk profile. The following table shows the debt-to-equity comparison between CAG, GIS, K and Hillshire Brands (NYSE:HSH).

Company

Debt to Equity

CAG

1.69x

GIS

1.42x

K

1.79x

HSH

1.67x

Click to enlarge

Source: Morningstar

Conclusion

I remain bullish on CAG. The stock, despite the decline in volume, net sales and underlining margins of its consumer and commercial segments, had an improving YoY total net sales and underlining margins trend with support of its private segment. Also, I believe the synergies expected from the Ralcorp business and the company's initiatives to entertain customers through price concessions and in-store initiatives will portend well for its future. Moreover, the stock remains an attractive investment option for dividend-seeking investors as it offers a sustainable dividend yield of 3.2%.

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.