An Attractive Food Retailer with Yummy Numbers
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The business of selling food is amongst those businesses which never go out of vogue, and for obvious reasons. But of course, no business can escape ups and downs in its lifetime. However, a company which is engaged in the business of feeding the ever growing population of a country is quite well placed to tide over short term hiccups. An example of such a company is ConAgra Foods (NYSE: CAG), which posted a not so stellar fourth quarter last week. But there’s more to ConAgra than what meets the eye.
Deciphering the quarter
Along with a jump of 6.3% in revenue to $3.41 billion, its bottom line stood at 51 cents per share compared to 47 cents per share last year. This was well ahead of the Street’s expectations and a strong reason for its shares to rise.
The Omaha based company witnessed a good quarter due to its list of acquisitions made during the year. It acquired frozen breakfast maker, Odom’s Tennessee Pride, fruit and vegetable seller, Del Monte Inc. and Kangaroo Brand’s pita chip business – all of which focus on different food segments. ConAgra admitted that an eye on growth and operational synergies has instigated the recent buyouts, and these would hopefully deliver value to investors going forward.
Apart from the acquisitions, the company also benefited from price hikes which were steps taken to fight cost inflation. These benefits were evident in the performance of its Consumer foods segment which constitutes almost 63% of ConAgra’s universe. This segment performed pretty well and is expected to continue its growth trajectory, building on the 6% improvement witnessed in the previous quarter.
The results are actually commendable since not all food retailers are able to manage cost inflation efficiently. One such example being Ralcorp Holdings (NYSE: RAH) which posted disheartening results, witnessing large declines in volumes because of increasing prices. Though its acquisition strategy saved its top line its bottom line was hit hard with a decline of 69% for the quarter.
Even the other segment, Commercial Foods unit, did well with a 7% rise in revenue. Along with the contribution from higher prices, higher volumes played a very important role. The growth in units sold was mainly attributed to sales from Lamb Weston potato operations.
The Path Ahead
ConAgra has tapped new potential in the food sector with a range of new products, especially the frozen breakfast line which is expected to go a long way for the company. It also plans to increase its marketing efforts, spending additional 10% in the coming months. ConAgra resorted to such strategies since the consumers are so very cautious about their spending habits, refraining from buying anything more than what’s needed. They are trying to stick to their budget as much as possible. To lure them is the biggest challenge for the food chains and this is where ConAgra is focusing on since it expects consumers to take a little more time to come out of the price hike shock. Considering a fruitful effort, it has projected a great outlook for 2012 of earnings in the range of $1.95 and $1.99 per share which is ahead of investor’s expectations of $1.93.
Valuation
Taking a look at ConAgra’s valuation from a P/E perspective, we find that it is fairly priced when stacked against its peers. Its trailing P/E of 22.66 might seem a bit expensive when compared to competitors’ H. J. Heinz (NYSE: HNZ) and Kraft Foods (NASDAQ: KRFT), which have trailing P/E multiples of 18.69 and 18.73, respectively. However, ConAgra is expected to have a bright future which is reflected by the forward P/E of 12.03. The lower forward P/E suggests that the company’s earnings are expected to grow significantly and perform well. In fact, even Heinz and Kraft Foods are expected to have a better future reflected in their forward P/Es of 14.01 and 13.42, respectively. But ConAgra takes the cake here as analysts expect it perform better than Heinz and Kraft.
Conclusive Thoughts
The food retailer has a chain of strategies in place to fight the economic headwinds, especially cost inflation. With productivity improvements, a cost savings program and stabilizing input prices, ConAgra is set to go a long way in the future. Also, it has been looking for more acquisitions in order to grow. It expects the benefits from the snacks business and the frozen breakfast business to boost the company’s top line in a big way, paving the way for a bright future.
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