This Company's New Strategy Should Mean Bigger Profits

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

The consumer food business is one that works in both good times and bad, and as such, the large, diversified food companies are one of my favorite investments for stability and long-term appreciation. One of my favorites in the space is ConAgra Foods (NYSE: CAG), which is one of the largest U.S.-based food companies with many well-known brands. With the company’s recent move toward private label (AKA “store brand”) offerings, I feel that now is a very opportune time to get into ConAgra before its next leg up.

A Little about ConAgra

ConAgra has an extensive branded food business, with such well-known product lines as Healthy Choice, Chef Boyardee, Slim Jim, Swiss Miss, and Hebrew National, just to name a few. Additionally, the company has a thriving commercial foods business, with products sold to institutional and foodservice companies, such as restaurants.

Recently, however, ConAgra has decided to shift their focus toward more private label products. In January, the company acquired Ralcorp Holdings, a manufacturer of primarily store brand products, whose sales are over $4 billion annually. This deal should benefit ConAgra in a few ways. First, store brand products are generally less expensive, both to make and to buy. This creates the potential to bring a significant number of value-conscious customers to their products.

Also, this acquisition should produce significant cost savings for both private label and brand name products made by the company, as some synergies should be possible as the acquisition becomes more integrated into ConAgra’s existing manufacturing methods. For example, Chef Boyardee canned pasta and store-brand canned pasta could possibly be made on the same equipment, use the same ingredients, etc. I have no idea if ConAgra plans to integrate their canned pasta manufacturing, but my point is that the acquisition of Ralcorp creates hundreds of these kinds of opportunities to run more efficiently.

In total, ConAgra has made seven acquisitions over the past two years, including Unilever’s Bertolli brand and P.F. Chang’s Home Menu business. All of the company’s acquisitions have been strategically done to maximize potential cost savings and manufacturing efficiencies, and to add value to the company’s stable of brands.

Valuation and Value

Speaking of value, ConAgra has been very good about creating some for their shareholders. With an above-average yield of right around 3%, ConAgra has raised the payout every year since 2008, when it divested its commodity trading and merchandising operations. The company also does a great job of creating value in the form of share buybacks, and in fact has reduced the number of outstanding shares by more than 8% since 2009.

ConAgra trades at 15.7 times the current fiscal year’s estimated earnings of $2.15 per share, which are set to be reported on June 27. The consensus calls for this to increase to $2.49 and $2.74 in fiscal years 2014 and 2015, respectively, for a 3 year average annual earnings growth rate of 14.2%, mostly thanks to the increased cost efficiencies that are expected to result from the recent acquisitions. The valuation relative to the company’s expected growth rate looks pretty attractive right now, but let’s take a quick look at what else is out there.

Nestle: The Biggest In the Business

Nestle (NASDAQOTH: NSRGY) is the largest food company in the world, by revenues, and have one of the most diverse and extensive product lines of any business in the market. To name a few of their brands, Nestle produces coffee and tea products (Coffee Mate, Nescafe, Sweet Leaf Tea), bottled water (Deer Park, Perrier), chocolate (Baby Ruth, Butterfinger), ice cream (Haagen-Dazs), baby food (Gerber), and frozen foods (DiGiorno, Hot Pockets).

Nestle pays a slightly better dividend yield of 3.2% but trades at a higher valuation of 18.9 times fiscal year 2013’s earnings. The company also has less projected growth and has almost completely capitalized on the international potential of its business, an area in which ConAgra still has tremendous room for growth.

Unilever: Not Just Food

Unilever (NYSE: UL) is a leading supplier of food products, but also has an extensive line of home and personal products. The company’s food brands account for just under half of the total sales and include Knorr, Wish-Bone, Country Crock, SlimFast, Lipton, and Breyers. The home and personal products make up the rest of Unilever’s sales and include such brands as Snuggle, Surf, Axe, Suave, and Vaseline.

Unilever trades for 17.4 times the current fiscal year’s earnings, but is only projected to grow its earnings at around 7% annually going forward. While the company does pay a healthy 3% dividend yield, I’m hesitant to invest in any company with significant exposure to the European economy right now.

Summary

Not only is ConAgra the most ambitiously growing of these food companies, it is also the cheapest. The company’s new emphasis on private label food products makes it even more recession-resistant than it already was due to their products’ lower cost structure and the increased efficiency that the acquisition will bring.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Unilever. 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

Compare Brokers

Fool Disclosure