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Summary

  • ConAgra Foods has taken a beating this year on account of weakness in its private-label business.
  • ConAgra is improving its product mix and also improving packaging in order to provide a boost to its private-label business.
  • ConAgra is also making moves in China to tap the food market there.
  • ConAgra's valuation, cash flow, and an impressive dividend yield should not escape investors' attention.

ConAgra Foods (NYSE:CAG) has faced difficult times in 2014. The stock is down 6%, and if recent fourth-quarter results are any indication, ConAgra might continue struggling in the short-term. ConAgra is suffering due to its underperforming private-label brands such as Healthy Choice, Orville Redenbacher's popcorn, and Chef Boyardee pasta. The weak performance from these brands led to a decline of about $60 million in profits in the private-label segment last quarter.

Positioned for improvement

However, the fact that ConAgra is investing in its network optimization plan, with initiatives such as closure of three plants, improvements in distribution centers, and new supply arrangements, could lead to improvements in the long run. Moreover, ConAgra's acquisition of Ralcorp for $4.95 billion last year has made it one of the top private-label food makers. If the company is able to get itself back on track and improve the performance of its brands, then ConAgra can get better in the long run.

ConAgra is trying to do just that. It has made changes to its underperforming brands to enhance performance. The company has shifted its promotion timings into the first quarter of 2015, with meaningful initiatives to make an impact. It is now focused on accelerating volume of its underperforming brands.

Strategic moves to note

ConAgra is also relying on strategic moves such as improvising its product mix to include more of proprietary Cafe Steamers offerings, and terminating a number of Healthy Choice's slow moving stock keeping units. Hence, the company is looking to cut down on underperforming brands, and instead focus on those that are driving its growth.

ConAgra has invested in its Café Steamers product line, which has turned out to be a key differentiated product. It has now decided to accelerate this specific product line with culinary-inspired steaming meals with a crisp and fresh taste that is 100% natural. The Mediterranean and Asian-inspired café steamers are expected to generate strong business for ConAgra in the coming months.

ConAgra is also trying to boost volumes in its Chef Boyardee brand, with the inclusion of the Easy Open lid on Chef Boyardee cans that the company had eliminated in the beginning of 2014. Moreover, ConAgra strongly believes that Chef Boyardee can do a better job with core category users by leveraging its protein content.

So, the company has re-tooled its merchandising program customer by customer to focus on the core user. The company's strategies are already at work as ConAgra is now seeing growth in Chef Boyardee microwave cups.

More moves

Moving on to other brands such as Totally Frozen meals, Slim Jim Meat Snacks, and Reddi-wip, ConAgra is seeing some strength, driven by higher marketing spending. In addition, the company is now focusing more on single-served meals in the frozen category.

Looking ahead, ConAgra expects its volumes to stabilize and pick up the pace in fiscal 2015. The company is confident that its strategies will allow it to deliver the same. ConAgra is actively involved in innovating and designing products, along with focus on packaging and promotional strategies. It has also boosted its R&D and supply chain resources to make sure that it is focusing on the right channels. ConAgra is also growing its retail outlets to accelerate its sales. Most of its brands are performing well in the emerging markets, particularly in Latin America, Mexico, and India.

To accelerate its development in the emerging markets, ConAgra recently acquired Chinese potato processor TaiMei Potato for $93 million. According to a press release:

This acquisition expands ConAgra Foods' Lamb Weston operations in a market that has growing demand for frozen potato products. Lamb Weston makes a variety of frozen potato, sweet potato and other vegetable products for restaurants, retailers and foodservice operators in more than 100 countries around the world. The purchase price of $93 million will not impact the company's previously discussed debt reduction plans in fiscal 2015 and will further its growth internationally.

Established in 2010, TaiMei is located in one of the largest potato growing regions in China. The facility provides Lamb Weston the ability to make frozen potato products closer to its expanding customer base and meet the growing demand for frozen potato products in Asia.

Key fundamentals and conclusion

Clearly, ConAgra is striving hard to bring its business back on track. As such, investors can consider buying the stock since it is currently trading at a cheap valuation. ConAgra trades at a trailing P/E of 16.5 and a forward P/E of 13. Also, it has generated operating cash flow of $1.55 billion in the past year.

ConAgra also pays a solid dividend yield of 3.50%, and this is another reason for investors to consider the stock for their portfolio. Hence, it might be a good idea to buy ConAgra shares on the dip.

Source: Why ConAgra Foods Looks Like A Buy On The Dip Opportunity