Pressurized Revenue And Contracted Margins Not Enough To Dampen ConAgra's Potential

| About: ConAgra Brands, (CAG)


Short-term performance likely to remain challenging due to integration of Ralcorp and weakness in consumer segment.

Long-term top line recovery of consumer and private brand segments will drive stock price.

Potential upside from Ralcorp synergies will also portend well for CAG.

I reiterate my bullish stance on ConAgra (NYSE:CAG). Although the company recently ended Q4FY14 with a relatively weak financial performance, the stock will perform well in the long term with its noteworthy future growth initiatives. Weakness in some categories and the private label pricing concessions adversely affected CAG's top line results. However, investments in core consumer brands, coupled with better pricing and an improved product mix of private brands will act well to grow the company's revenues and profitability in the coming quarters. Moreover, the future synergy expected from better Ralcorp integration will also portend well for the stock. Also, the stock offers a dividend yield of 3.5%.

Long-term security is visible

In the recent past, the stock has been experiencing pressure on its top line results from its consumer and private segments. The company recently ended Q4FY14 by posting a revenue decline of 2.8% year-over-year. The company's commercial segment posted a modest growth of 1% year-over-year, thereby lowering the burden of consumer and private segment losses on the overall revenue base of the company in Q4FY14.

A rise in sales from the Lamb Watson Potato business, both in the U.S. and the international scale increase, was the major recent quarter's revenue driver for the company's commercial segment. CAG's Lamb Watson business will continue to report positive results in the coming quarters through the expanded international presence of CAG's commercial foods. Moreover, the better crop beginning in the second quarter of FY15 will improve the margins of the segment.

CAG's consumer segment contributed 40% towards the company's overall revenue base in the recent quarter. The segment's revenue showed a decline of 7.4% year-over-year, fueled by a 7% decrease in volume and a 1% negative foreign exchange impact. Thus far, the 7% volume decline also affected the profitability of the consumer segment. The segment's operating profit was down 3% year-over-year in Q4FY14. Softness in the packaged food industry's performance in past the few quarters, coupled with CAG's poor performance in large consumer brands like Healthy Choice, Chef Boyardee and Redenbacher adversely affected the volumes of the consumer segment.

The company has been consistently making efforts to improve the performance of the consumer segment's three major brands. With its recent initiative to improve the product mix of the Healthy Choice brand, moving to its proprietary Café Streamers offerings and discontinuing a number of other Healthy Choice slow-moving SKUs, I believe CAG will improve its volumes in the long run. In the recent quarter's conference call, management announced that they see good growth opportunities in Chef Boyardee. In the coming quarters, CAG will focus on the core user through constant efforts by re-equipping the merchandising program customer by customer. Also, the company has been constantly losing its share in Orville Redenbacher to its close competitors. To get back its market share, management now focuses on becoming more competitive and more perfect at retail.

As for now, I believe these promising initiatives on the part of the management to better core brands will portend well to grow the volumes and the revenue base of the consumer segment. In addition, these initiatives will also grow the profitability of the segment in the long term.

The company's private brand segment reported relatively flat $1029.9 million in revenue for Q4FY14. However, the profitability of the private brand segment remains weak since the acquisition of Ralcorp Holdings. Although CAG became the biggest U.S. private label food company with the Ralcorp acquisition, the previous year's pricing concessions offered by CAG to protect the customer losses at Ralcorp, and the higher-than-anticipated operational cost faced due to challenges offered by the Ralcorp integration contracted the margins of the private brand segment, which I believe is a short-term concern and will improve in the long term due to better integration efforts.

The segment posted a loss of $573 million in Q4FY14. Going forward, the management plans on driving growth from Ralcorp through better pricing and improved mix, which will grow the volumes and the revenues of the private brand segment. Also, the segment's margins will improve once the integration of Ralcorp is completed. Also, the $300 million in synergy expected from the Ralcorp acquisition by the end of FY17 will portend well to grow the long-term profitability of the company.


Despite the recent quarter's pressurized revenue and contracted margins for CAG, I believe the stock has the potential to perform well in the long term; however, the short-term performance is likely to remain challenging due to the integration of Ralcorp and a weakness in the consumer segment. The top line recovery of the consumer and private brand segments, in the long term, will drive the stock price. Moreover, the potential upside from Ralcorp synergies will also portend well. Also, I believe CAG will unfold the benefits of its management's continuous growth-generating initiatives in the long term.

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