This Food Stock Still Looks Delicious

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ConAgra Foods (NYSE: CAG) likes to say that it makes the food we all love. Well, fourth-quarter earnings blew away expectations, so that statement is looking to be correct. Its brands are thought to be in 97% of all American households. The company's portfolio of brands consists of Hunt's, Healthy Choice, Orville Redenbacher's, Peter Pan, Bertolli, Blue Bonnet, Slim Jim, and Chef Boyardee among others.

The original acquirer

ConAgra was one of the first food companies to grow via acquisition. Starting with the 1980 purchase of Banquet Foods, the company has gone on to assemble its food brands by buying brands from other food companies. Many consumer product firms went through leveraged buyouts and non-core assets were sold off. ConAgra was able to benefit by buying assets other firms didn't want. ConAgra continued its acquisition spree that just recently included the purchase of Ralcorp for $5 billion.

In the latest quarter, earnings grew 18% to $0.60 per share. Sales increased 34% to $4.6 billion, driven by the acquisition of Ralcorp. For the full year, earnings per share increased 18% to $2.16 per share.

The company raised its long-term forecast. ConAgra sees annual growth of 7% to 9% for earnings and 3% to 4% for sales. That is up from its prior growth targets of 6% to 8% for earnings and 3% for sales. In terms of the Ralcorp acquisition, the company raised its expected cost savings from $225 million to $300 million. By 2017, the company expects earnings per share to be $3.00 compared to $2.16 last year.

For investors, the stock is attractive and trades with a forward P/E of 12. The company pays an annual dividend of $1.00 per share for a yield of 2.90%. The dividend payout is 54%.

Growth over the next several quarters is likely to come from increased advertising spending and new products. Among the new products is Marie Callender's Easy Sides, a shelf-stable pasta side sold in microwaveable pouches. A short-term hit to earnings will come from the loss of a major customer in its Lamb Weston potato business. This will likely cut this year's earnings by $0.06-$0.07. Even though this is a negative item for the company, I think it has enough going for it with new products and synergies from the Ralcorp acquisition to make up for this loss.

The competition

The food products sector is extremely competitive and two of ConAgra's biggest competitors are Kraft Foods (NASDAQ: KRFT) and Nestle (NASDAQOTH: NSRGY). Both have very strong food brands and are aggressive in advertising and developing new products.

Kraft Foods is in practically every corner of the North American grocery store. Its products include Kraft, Crystal Light, Jell-O, Kool-Aid, Miracle Whip, Oscar Mayer, Planters, Maxwell House, and many other brands.

Even though Kraft is considered to be focused on the slower growth North American grocery business, the company is a very well-run one. The company has been focusing on stronger productivity gains and cost savings in its operations. The improvements showed in the company's first-quarter results where revenue grew 2.1% and operating income increased 9.2%.

Going forward, I see the company continuing its restructuring efforts and returning more cash to shareholders. The company has been steadily increasing its dividend and now pays $2 per share for a yield of 3.6%. To do so, Kraft Foods just announced that it's creating two new business units to manage its brands. One will be meal and desserts and the other will be enhancers and snacks. The goal is to allow each division to be run separately and develop new products, grow and reduce costs. The end result will be a much leaner Kraft Foods that can pay out more money to shareholders.

Nestle is a multinational food company with revenue of over $98 billion. Its products include baby food, bottled water, breakfast cereals, coffee, dairy products, frozen foods, ice cream, pet foods, and snacks.

The biggest argument some investors make about owning Nestle is that the company is, in fact, too large. That its ability to grow and deliver the returns of the past are going to be harder going forward. The problem I have with this is that the company has not shown any evidence of slowing down. Last year, the company had quarterly revenue growth of 12% and quarterly earnings growth of 14%.

Nestle also has the resources to continue investing in innovation. With over $10 billion in cash on its balance sheet, the company is looking to plow that back into research and development. Nestle just announced that it is spending $53 million on a new product technology center in Ohio. This will be the company's 12th such facility worldwide. It's initiatives like these that have made Nestle number one in the frozen foods market with its brands Stouffer's, Lean Cuisine, Hot Pockets, and Digiorno.

Foolish assessment

I really like the foods business and, in particular, ConAgra. The acquisition of Ralcorp is looking better and better for the company. The long-term outlook for the company is bright along with that of the other food companies in the market. In the end, people have to eat and the food business is the place to be.

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