This Food Giant Looks Quite Appetizing
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since July 2012, ConAgra Foods (NYSE: CAG) has experienced quite a good gain on the market, rising from $24.30 per share to more than $35 per share. It has also risen by more than 5% in one trading day, after it reported an impressive fourth quarter earnings results. Is ConAgra a good buy after strong fourth quarter earnings? Let’s find out.
Impressive fourth quarter earnings results
In the fourth quarter, ConAgra generated nearly $4.6 billion in revenue, an impressive growth of 33.7% compared to the revenue of $3.43 billion in the fourth quarter last year. While the Consumer Foods and Commercial Foods segments experienced sales increases of 7% and 3.5%, respectively, the significant growth in revenue was due to the inclusion of $962 million in the revenue of Ralcorp Food and Ralcorp Frozen Bakery Products. Including Ralcorp operating results, the operating profit came in at $554.5 million, 36.1% higher than the operating profit of $407.5 million in the fourth quarter last year. The net income was $192.2 million, or $0.45 per share, a significant improvement compared to the loss of $86.2 million, or a loss of $0.21 per share last year.
High leverage with negative tangible book value
The company’s CEO Gary Rodkin felt bullish about the recent operating results, he said: “We are pleased to have driven a 17% increase in comparable EPS for fiscal 2013, and to have posted comparable year-over-year Consumer Foods volume growth in the fiscal fourth quarter as planned.” After Ralcorp’s acquisition, ConAgra increased its leverage level significantly. As of March 2013, it had $5.36 billion in equity, $183.9 million in cash and nearly $8.7 billion in senior long-term debt. It also booked $185 million in notes payable and $517.9 million in current installments of long-term debt. Thus, the net debt amounted to more than $9.2 billion. The goodwill, trademarks & intangibles also rose significantly. In March 2013, it had more than $8.45 billion in goodwill and more than $3.4 billion in brands and trademarks and other intangibles. Consequently, ConAgra had a negative tangible book value of nearly $(6.5) billion.
Relatively cheap compared to its peers
What I like about the company is its relatively low earnings valuation. At $35 per share, ConAgra is worth $14 billion on the market. The market values ConAgra at nearly 12.8 times its forward earnings. Compared to its peers Kraft Foods (NASDAQ: KRFT) and Mondelez (NASDAQ: MDLZ), it has the lowest valuation among the three. Kraft Foods is trading at $55.30 per share, with a total market cap of $32.9 billion. The market values Kraft Foods as the most expensive, at 17.4 times its forward earnings. Mondelez also has a higher valuation. At $29.10 per share, Mondelez is worth $52 billion on the market. It is valued at more than 16.9 times its forward earnings.
Kraft Foods is the ex-parent of Mondelez. The spinoff of Mondelez separates the two businesses with different focuses. While Kraft Foods concentrates on the mature North American grocery business, Mondelez’s main battlefield is emerging markets including Brazil, China and India. Consequently, Kraft Foods pays a higher dividend yield at 3.7%, but it is the slower growth business. Mondelez, with 45.4% of the total revenue coming from developing markets, has a much higher growth potential, but it offers a lower dividend yield at 1.8%. Like Kraft Foods, ConAgra’s dividend yield is also quite juicy, at around 3%.
Potential synergies of Ralcorp acquisition
Looking forward, Mondelez expected that its organic top line growth would stay in the low end of 5%-7%. It might face some near-term difficulties, including capacity constraints and lower coffee pricing in several markets. The operating EPS might come in at around $1.55 to $1.60 per share. For Kraft Foods, it was expected to deliver around $2.75 in EPS, including restructuring program cost of around $300 million for the year. The free cash flow would be around $1 billion. ConAgra will enjoy more benefits from Ralcorp acquisition, including Ralcorp’s efficient sales channels and price points. Moreover, it could have a more balanced product portfolio. After the acquisition, the Branded segment would be the largest revenue source, accounting for 43% of the total sales while the Private Label and Commercial/Foodservice represented around 25% and 32%, respectively, of the total revenue.
My Foolish take
Despite the high leverage level, ConAgra looks quite attractive with significant synergies from the Ralcorp acquisition. In addition to the above-mentioned operating synergies, ConAgra also expected to realize around $225 million per year by the fourth year in cost synergies. If ConAgra has a similar earnings valuation to Kraft Foods and Mondelez at around 17 times forward earnings, ConAgra should be worth more than $46.50 per share, nearly 33% premium to its current trading price.
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