ConAgra Gets No Respect

 |  About: ConAgra Foods, Inc. (CAG)
by: Skafan

ConAgra (NYSE:CAG) is a food company with sales of $12.3 billion and net income of $0.8 billion for the year ended May 2011. The business is 65% consumer brands and 35% commercial food. The commercial business is commercially branded foods and ingredients sold to food service, food manufacturing and industrial customers. Commercial products include specialty potato products, milled grain ingredients, vegetable products, and seasonings. The company's consumer brands include Chef Boyardee (canned pasta for children), PAM (leading no-stick cooking spray), Marie Callender (frozen meals and pies), Banquet (frozen foods), and Healthy Choice (frozen food and canned soups). ConAgra also owns Hunt's (ketchup and canned tomato products), Reddi-Whip, Slim Jim, Hebrew National (hot dogs), Wesson (vegetable oil), Orville Redenbacher (popcorn), and many other brands. Diluted EPS for FY 2011 was $1.90 with dividends of $0.89 per share. The company's results for the nine months ended February 2012 were consistent with the prior year, except that the dividend was increased.

ConAgra's sales and net income have been flat for the past five years. Sales were $10.1 billion in 2007 with net income of $0.76 million, which is consistent with the figures for FY 2011. Nevertheless, the company gets no respect for the recent string of acquisitions and divestitures that have been slowly transforming it.

ConAgra announced the acquisition of Odom's Tennessee Pride on Tuesday, April 17. Odom's is the second-largest producer of frozen breakfast sandwiches in the U.S., with annual revenue of approximately $190 million. The stock didn't react to this news, with just a 1.3% gain from Tuesday to Friday of this week.

The Odom deal is part of a well-established trend of acquisitions and divestitures in the past few years. The company purchased Del Monte Canada for $185 million in early March 2012. Each year this iconic brand sells approximately $150 million of packaged fruits, fruit snacks and vegetables in Canada. In November 2011, ConAgra purchased National Pretzel, a private label supplier and branded producer of pretzels with annual sales of $200 million. The purchase price was approximately $300 million. During the previous fiscal year (FY 2011), the company purchased Marie Callender for $131 million. This was followed up with the purchase of the Marie Callender brand name in Q1 of FY 2012 for $58 million. Sales for this business were not disclosed in the ConAgra's SEC filings, but they were likely substantial given the purchase price. Finally, the company acquired an additional $10 million stake in Agro Tech, a publicly traded food company in India, during November 2011. This deal provided the company with a controlling interest in this business with sales of approximately $130 million.

ConAgra didn't just purchase businesses, but it pruned its portfolio through divestitures. The Gilroy Food and Flavors business was sold for $245 million during the first quarter of FY 2011. ConAgra also sold its frozen handheld business during FY 2011 for $8.8 million. These divested businesses had sales of $355 million and a net loss of $19 million during FY 2010.

These acquisitions and divestitures represented more than 7% of FY 2011 sales. The company also pursued a mega-deal during FY 2012 with a bid to purchase Ralcorp. ConAgra sought to purchase Ralcorp in May 2011 for $4.9 billion, or $86 per share, and later increased the offer to $94 per share. This was a truly large potential acquisition, given the company's market capitalization of approximately $10-$11 billion. The deal was ultimately rejected by Ralcorp, but it demonstrated ConAgra's commitment to growth.

Despite this deal activity, the stock has been stuck between $24 and $27 for most of the past year. Two years ago the stock was around $24-$25 per share, and one year ago the stock was around $24 per share. The stock closed on April 20, 2012, at $26.25, with a trailing P/E of 13.85 based on FY 2011 diluted earnings of $1.90. EPS estimates (as per Yahoo Finance) are $1.78 for the FY ending May 2012 and $1.93 for the FY ending May 2013. The company also has a dividend yield north of 3.5%. The free cash flow yield is approximately 7%, based on my recently published analysis.

These valuation metrics and the recent lack of share price movement after the Odom acquisition on Tuesday indicate to me that ConAgra isn't getting enough respect from Wall Street for its portfolio management efforts. ConAgra has demonstrated a trend of pursuing acquisitions to grow the business. These efforts will likely translate eventually into improved operating performance if the acquisitive trend continues. In addition, there is always the chance that another transformational deal like Ralcorp will materialize.

I like ConAgra for its dividend yield and the generally stable nature of its food business. However, I view its recent acquisitiveness as an added bonus. While Wall Street is fixated on the years of flat income and sales, I think they are underestimating the company's growth efforts based on the above-mentioned deals.

(Unless otherwise noted, all data in this article was obtained from ConAgra press releases, the FY 2011 annual report, and the 10-Q filing for the quarter ended February 2012.)

Disclosure: I am long CAG.

Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions.