ConAgra – A Good Long-Term Bet for Patient Investors

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ConAgra Foods (NYSE: CAG), North America’s largest packaged-food company, recently reported its earnings for fourth quarter of FY 2013. The company managed to beat the street estimates by $0.01, reporting adjusted diluted EPS of $0.60. Even though the company is very bullish on its future performance in FY 2014 and beyond, it may not perform as expected in the near term. As with many other companies in the food industry, ConAgra is a good bet for a long-term investment given a three-to-five year investment horizon. 

Let’s get a taste of what the company has for its Foolish food-lovers.

Fourth Quarter 2013 -- A little too sweet, a little too salty. The sweet...

The company reported 18% growth in its adjusted diluted EPS over the year-ago quarter. Full-year EPS stood at $2.16, implying growth of 17% over the last fiscal period. ConAgra reported revenue growth of 33.7% on a year-over-year basis while full-year revenue grew by 15.9%. The increase in the quarterly revenue was mainly due to the acquisition of Ralcorp, which contributed $962.0 million or 83% of the total increase in the quarter. The existing operating segments of the company – consumer foods and commercial foods, contributed the remaining 17% of the revenue growth for the quarter.

The company witnessed revenue growth of 7% from its consumer-foods segment. However, the segment only grew by 3% organically, with the majority of the increase, or 5%, coming from the acquisition of Ralcorp, which helped to offset a 1% decline that occurred due to an adverse price/mix.

The company adopted active marketing strategies to boost sales. It used effective management of margins, which offset the high input costs as a result of inflation. As a result, the operating profit increased by 3% to $295.0 million from $288.0 million in the same quarter a year ago on an adjusted basis.

Revenue from the commercial foods segment increased by 3.5%, primarily due to strong performance in the flour mills operations backed by better volumes, a favorable mix and other factors.

Sales from Ralcorp businesses are reported under two divisions – Ralcorp Food Group and Ralcorp Frozen Bakery Products. The two segments combined reported an operating profit of $107.8 million.

The salty…

The majority of growth in sales for the quarter was due to the recently acquired business. Organic growth in the consumer foods segment was marginal in the quarter.

The company faced major problems in the commercial foods segment, where it lost a major customer in its Lamb Weston potato operations; that customer did not renew its contract. ConAgra is expected to have a negative impact of between $0.06 and $0.07 on its EPS for FY 2014 while it replaces its lost revenue. Although Lamb Weston reported an impressive domestic operating performance, it suffered a marginal decline in operating profits from its international operations, primarily due to weak Asian markets.

The company is also expecting a dilution in its FY 2014 EPS of $0.03 as a result of its new joint venture “Ardent Mills” with Cargill and CHS, an integrated agricultural company. Once formed, Ardent Mills is slated to become the largest flour-milling company in the US. The overall impact of Lamb Weston’s operations on the company's FY 2014 EPS is expected to be approximately 4% given an expected full-year EPS estimate of $2.40.

The road ahead – overall impact

ConAgra has raised its expected EPS for FY 2014 from $2.15 to $2.40. The company expects that the new joint venture will be accretive to its EPS in the future. It expects to report an annual gain of $300 million in cost-related synergies by 2017 due to the acquisition of Ralcorp, revising its earlier estimate of $225 million.

The company has also announced that it expects minimum growth of 10% in its adjusted EPS for the next three years, which would result in an annual EPS of greater than $3.00 for FY 2017. The expected growth in earnings over the next three-to-four years is estimated on the basis of the synergies that will accrue from the Ralcorp acquisition.

The table below demonstrates the expected return to an investor who invests in the stock today for an investment horizon of four years:

<table> <thead> <tr><th> </th><th> <p><strong>2013</strong></p> </th><th> <p><strong>2014</strong></p> </th><th> <p><strong>2015</strong></p> </th><th> <p><strong>2016</strong></p> </th><th> <p><strong>2017</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Adjusted Expected EPS</p> </td> <td> <p>2.2</p> </td> <td> <p>2.4</p> </td> <td> <p>2.6</p> </td> <td> <p>2.9</p> </td> <td> <p>3.2</p> </td> </tr> <tr> <td> <p>Current PE</p> </td> <td> <p>16.2</p> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td> <p>Current Price</p> </td> <td> <p>34.9</p> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td> <p>Expected Price</p> </td> <td> </td> <td> <p><em> 38.81 </em></p> </td> <td> <p><em> 42.69 </em></p> </td> <td> <p><em> 46.96 </em></p> </td> <td> <p><em> 51.66 </em></p> </td> </tr> <tr> <td> <p>Expected Annualized Return (%)</p> </td> <td> </td> <td> <p><em>11%</em></p> </td> <td> <p><em>11%</em></p> </td> <td> <p><em>10%</em></p> </td> <td> <p><em>10%</em></p> </td> </tr> </tbody> </table>

Source: Yahoo! Finance

Peer analysis

ConAgra looks relatively cheap when we compare the it with its peers.

<table> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>Trailing Price-to-Earnings Ratio</strong></p> </th><th> <p><strong>Forward Price-to-Earnings Ratio</strong></p> </th><th> <p><strong>PEG Ratio (5 year expected)</strong></p> </th><th> <p><strong>Trailing Price-to-Sales Ratio</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>ConAgra</strong></p> </td> <td> <p>18.88x</p> </td> <td> <p>12.89x</p> </td> <td> <p>1.23x</p> </td> <td> <p>1.03x</p> </td> </tr> <tr> <td> <p><strong>Kraft Foods </strong><strong></strong></p> </td> <td> <p>20.76x</p> </td> <td> <p>17.57x</p> </td> <td> <p>3.26x</p> </td> <td> <p>1.78x</p> </td> </tr> <tr> <td> <p><strong>Nestle</strong><strong></strong></p> </td> <td> <p>18.49x</p> </td> <td> <p>15.93x</p> </td> <td> <p>3.68x</p> </td> <td> <p>2.11x</p> </td> </tr> </tbody> </table>

Source: Yahoo! Finance

ConAgra is trading a trailing PE ratio of 18.9x, which is slightly higher than Nestle (NASDAQOTH: NSRGY)When comparing the stock on the basis of forward PE ratio, PEG ratio and trailing P/S ratio, ConAgra is the cheapest of all the peer companies, which highlights the fact that it is undervalued.

One of the closest competitors of ConAgra, Kraft Foods (NASDAQ: KRFT), is one of North America’s largest beverages and consumer packaged-food companies with annual sales of more than $18 billion. The company is on a roll ever since it spun off its global snacks and candy business into a separate entity, Mondelez International.

Kraft Foods reported strong first quarter numbers with revenue of $4.5 billion, implying organic growth of 2.1%, and adjusted EPS of $0.76, surpassing analysts’ estimates by $0.12. However the company is expected to grow at 6% annually over the next five years given the fact that its business is concentrated in North America where the packaged-food industry is mature and extremely competitive.

Nestle (NASDAQOTH: NSRGY) is a Swiss multinational nutritional food company with annual revenues of $98 billion. The company’s products include infant food, coffee, bottled water, frozen food etc. Nestle recently reported organic growth of 4.3% for Q1 2013, falling short of FY 2012 organic growth of 5.9%. It expects to grow at a rate of 5% to 6% in FY 2014 as a result of a slowing global economy, particularly in the emerging markets where the company witnessed a fall in revenue growth to 11.0% in 2012 from 13.3% in 2011.

The Foolish bottom line

ConAgra is a real long-term bet given the current scenario. The company will face some issues in the first quarter of FY 2014 due to its Lamb Weston operations and the formation of Ardent Mills. Post first quarter, the company is expected to do well on the back of synergies from the Ralcorp acquisition. Even on the conservative side, it can provide handsome returns to investors in the next three-to-five years. In my opinion the stock is a strong buy at the current prices and  investors should accumulate shares at every decline.

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Nikita Bajaj has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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