ConAgra Foods: A Candidate For Value-Enhancing Split-Up Or Divestiture

| About: ConAgra Brands, (CAG)
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Packaged food company ConAgra Foods (NYSE:CAG) is a prospective candidate for a corporate split up activity because of its size and diversity. Given the packaged food industry's increased activity for such a break up, a split up or divesture could provide an opportunity to lift the company's sum of the parts valuation or unlocking the value. The stock's significant PE discount versus its rivals makes it appealing.

For the fiscal year 2012, CongAgra Foods' consumer foods division represented 63 percent of its total sales of $13.26 billion, while the remaining 37 percent revenue came from commercial foods division. Similarly, consumer foods' operating profit represented approximately 66 percent of the total $1.599 billion and the remaining 34 percent came from commercial foods division.

There is a potential that commercial food division of ConAgra Foods may be hived off as a separate unit in tune with the industry's current pattern. Another possible scenario will be to divest its private label food unit to a bigger rival. In an equity research note to clients recently, S&P Capital IQ equity analyst Tom Graves views, "In an environment where consumers are increasingly cost conscious and looking to save money on food purchases, we think that store-brand foods will be attractive to consumers and of interest to investors."

The potential split up or divestitures gain ground as at least three big food companies are either planning for a major spin-offs or are completing them so far in 2012. The formerly known Sara Lee is a good example. The company has been split into two and renamed as Hillshire Brands (NYSE:HSH). Similarly, Kraft Foods (KFT) is being split into a domestic grocery business and a global snack food company. Another company in the industry, Ralcorp Holdings (RAH) had split about 80 percent of its stake in its Post cereal unit and is now functioning as Post Holdings (NYSE:POST).

Interestingly, CAG stock is trading approximately 25 percent PE discount to an average for a group of similar packaged foods share, according to S&P Capital IQ. The expectation is that the discount gap will narrow with the potential benefits from ConAgra Foods' acquisition strategy getting increasingly appreciated. The company has been initiating small to mid-size acquisitions that are expected to fuel growth at a time when the industry is struggling with a weak volume growth in the U.S.

Analyst Tom Graves commented, "We think this strategy should enable CAG to achieve distribution synergy and overhead leverage, plus position the company to have more clout with retailers. Since November 2011, CAG has made five acquisitions, which we expect will add more than $600 million to reported annual revenue."

ConAgra's price performance up to July indicated a 6 percent fall versus 0.5 percent fall for the packaged foods and meats sub-industry in the S&P 1500 apart from a 9.3 percent gain in the overall S&P 1500 index for 2012. The primary factor for the stock to under perform seemed to be the lackluster growth in the recent years and lack of analysts' support. This was evident when only six of the 16 analysts have recommended the stock as Buy or Outperform, while nine analysts have kept it Hold rating.

For the fiscal year 2013, S&P Capital IQ expects sales to grow by 5 percent and earnings of $1.97 a share, while Street analysts are predicting revenue growth of 4.8 percent and earnings of $1.98 a share.

Meanwhile, S&P Capital IQ has kept a 12-month price target of $29 and reiterated with a Buy rating.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.