This Stock Looks Attractive

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the prevailing economic environment where people are finding it difficult to survive the impending crisis, companies which provide the lowest rates as well as innovative products tend to win. Though there is a section of people who don’t mind splurging on branded products at any point of time, there is a large section of customers who are greatly influenced by price and promotions.

This is what is understood and followed continuously by the packaged food retailer ConAgra Foods (NYSE: CAG). The company has been performing well owing to its expansion in the low priced private label products which are faring well since it is lighter on consumers’ pockets. The food company posted a stellar quarter recently and snatched all the attention of investors. Let us understand the company better.

Driven By Acquisitions…

ConAgra’s keenness of expanding its consumer products segment through a host of acquisitions has been instrumental to its success. This led to a 9% surge in revenue to $3.74 billion. Both the consumer and commercial foods segment performed remarkably well. Consumer product's revenue jumped a whopping 11% driven by the addition of products, such as pita chips, frozen meals and various breakfast sandwiches, in the last few months.

In fact, there are more acquisitions planned for next year such as Ralcorp Holdings which will carry a number of advantages. The deal will not only strengthen ConAgra’s market position, but will also add a number of private-labels to the acquirer’s portfolio. Additionally, the buyout will lead to cost synergies, making it even more lucrative under the current circumstances.

Efforts Therein…

Most importantly, ConAgra boosted its promotional efforts and is expected to increase it further in the next few months. The move has been initiated because of restricted spending habits of consumers as well as ConAgra’s strategy of a price hike which might scare away customers. Though this affected volumes in ConAgra’s core business, the company is expected to manage it pretty soon when people get used to the new prices.

The Competitive Environment

Increase in prices was necessary for the food retailer since cost inflation had been hurting its bottom line and rivals such as General Mills (NYSE: GIS) had already started reaping the benefits of higher pricing. There are other reasons also which have benefited General Mills’ volumes. Its entry into the yogurt business has been a commendable one. General Mills’ introduction of a wide variety of yogurt flavors has more than helped the company to attract customers in hordes.

As people are becoming more and more health conscious there has been a major shift of focus for food companies to natural and organic products. ConAgra took advantage of this trend. Their large variety of organic foods was amazingly accepted by the market.

On one hand, ConAgra ramped up its advertising and on the other its peer Diamond Foods (NASDAQ: DMND) has cut down on its promotional spend. The unfavorable impact of cutting down on marketing spend showed up on Diamond Foods’ recent quarter as well as on its stock price. Lower demand led to a revenue decline of 10% to $258.5 million in Diamond’s recent quarter. The stock price performance of the three industry players in the last one year is depicted in the chart below:

<img src="" />

CAG data by YCharts

ConAgra has been a remarkable performer which has enabled the retailer to provide a 10% return to its investors over last one year. Also, it has been trading near its 52-week high and is still increasing which makes it an even more interesting bet.

The Bottom Line

ConAgra has become increasingly attractive since it continues to enhance its product portfolio with a special focus on frozen meals which is giving great results. The company has been performing well and is setting new benchmarks with each passing quarter. Moreover, it revised its guidance as it becomes even more positive about its prospects. Its potential acquisition of Ralcorp will also be a turning point in the journey of ConAgra. On the whole, this food company looks like a great investment opportunity and investors should definitely not ignore this.

justhimanshu has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus