ConAgra Foods Spin-Off: What To Do?

| About: ConAgra Brands, (CAG)

Summary

ConAgra Foods is planning to spin-off its french fries business.

The spin-off company's name will be Lamb Weston.

This corporate action could unlock some value, but long term the business has issues.

ConAgra Foods (NYSE: CAG) is spinning off its frozen potatoes business. They filed Form 10 on July 13, 2016 which helps layout specifics of the business. The record date and share distribution ratio haven't been disclosed yet.

Lamb Weston is a leading provider of frozen potato products. The main business is selling frozen French fries to restaurants and snack bars in the United States and internationally. In the filing ConAgra said, "Internationally, the opportunity to expand consumption of frozen potato products is significant." Currently, Lamb Weston will be the leading supplier for North America and the second largest internationally. With the spin-off they hope to create more focus and take the number one spot internationally by using alliances and strategic acquisitions.

On June 27th ConAgra signed an agreement with Russian company Belaya Dacha in a JV partnership. Frozen potato volumes have grown at a compound double digit rate in recent years.

Sales for 2015 were $3 billion. Net income came in at $268 million which gives a 9% profit margin. With more focus as a separate company management hopes to expand margins.

Revenue Segments

Global - The Global segment is the provider of frozen French fries, sweet potato fries, vegetables, and appetite's. This segment made up $1.7 billion of sales. Their largest customer is McDonalds (NYSE: MCD) and services top 100 restaurant chains in North America.

Foodservice - This segment accounts for $900 million in sales and provides frozen potato products to regional chains and independent restaurants.

Retail - The retail reporting segment accounts for $400 million in sales and provides private label and licensed branded frozen potato products and other frozen products sold to retail customers in the United States.

Other - Other reporting segment is equity earnings from joint ventures which is a very small part of earnings.

Concluding thoughts

An analyst at Deutsche bank has a price target on ConAgra Food of $48 per share which it trades right around there currently. I estimate Lamb Weston accounts for $10 of the total. This doesn't fully account for the possible growth internationally, since the spin-off company is still wrapped up within Conagra Foods.

Lamb Weston is still in the business of selling frozen products and consumers are being more health aware in North America. This doesn't bold well for growing sales in the United States. As a long term investment I don't like the products they sell. Consumers are switching to eating fresh healthy food. If Lamb Weston can maintain sales in North America and grow sales international this could create a short term investment opportunity.

We still need to understand the full amount of debt will be raised at the time of spin-off. This will help determine the cash flow that Lamb Weston will be providing investors. ConAgra Foods doesn't appear cheap, so it might be advantageous to wait until after the spin-off to see the share price action.

Disclosure: I/we 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.

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