A Positive Outlook for This Joint Venture
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Major grain companies ConAgra Foods (NYSE: CAG), Cargill, and CHS (NASDAQ: CHSCP) are undertaking a major joint venture called Ardent Mills. By merging Horizon Milling, a Cargill and CHS joint venture, with ConAgra Mills, Ardent Mills will become the largest flour milling company in the United States with 44 flour mills, three bakery mix facilities, and a specialty bakery under its control.
This merger promises to protect the grain market positions with baking plants that are facing division among new or different operators. Expected to make up 34% of the U.S. market in terms of milling capacity, this merger will be of major significance in the grain industry.
Who will benefit?
CHS, a Minnesota-based agribusiness owned by farmers, ranchers, and cooperatives across the United States, and Cargill, a privately-owned, Minneapolis-based international producer and marketer of food, agricultural, financial, and industrial products and services have already undergone a successful joint venture, Horizon Milling. So successful in fact, Horizon Milling is now considered to be the number one U.S. milling company with the highest milling capacity and reported sales of $ 2.5 billion in fiscal 2012.
This joint venture has also been increasingly profitable over time with CHS' share of earnings in 2012 amounting to $2.3 million more than in 2011. With an 11% increase in stock price over the past year, CHS is not entering in on this joint venture as a last resort. Not only has CHS performed well in 2012, it has had increasing and steady growth over the past five years as seen by a 28% increase in stock price.
ConAgra Foods, a Nebraska-based consumer and commercial foods producer, also had a fantastic 2012. As the number three U.S. milling company with reported sales of $1.8 billion in 2012, this joint venture will only mean bigger and better things for ConAgra. ConAgra has seen an even larger increase in stock price in 2012 than CHS with a 41% jump during the past year from prices rising from $25 to $35.
So far, ConAgra has increased its earnings 16.87% this year. Additionally, there has been a 25% increase in EPS so far in the 2013 fiscal year compared to the entire 2012 fiscal year. Acquisitions of well known brands such as Del Monte Canada, National Pretzel Company, and Kangaroo Brand pita chips and the coveted position as Wal-Mart's number two multinational supplier may be responsible for much of this increase.
This merger has been so favorably received that set backs like the recall of Orville Redenbacher's Classic Kettle Korn due to packaging problems about a week before the merger announcement, has not even made a dent in ConAgra's progress. With a P/E of 26.6, investors are excited about ConAgra's growth. Analysts predict that ConAgra will increase in stock price by 6.7% to 24.4% over the next 12 months.
Who is left out?
Left out of the joint venture is Archer Daniels Midland (NYSE: ADM), an agricultural commodities company thought of as the number two U.S. milling company, which has been struggling over the past year due to a drought last summer. In the previous quarter, Archer Daniels was not able to match its EPS from last year by $0.12, or 20%. With a forward P/E of 10.96, 6.6 less than the current P/E, Archer Daniels claims to grow its earnings in the coming year, but investors are still unsure. Being left out off Ardent Mills will seriously limit its competitive edge in the milling industry. Many analysis suggest to hold this stock because predictions on future stock price growth over the next year range from (11.9)% to 18.5%.
The bottom line
This major joint venture will benefit investors of both ConAgra and CHS significantly, considering that this joint venture is truly an attempt to strengthen market positions of all companies. None of the companies merging into Ardent Mills are considering this merger to be a risky endeavor, so neither should investors. With investors already benefiting from higher stock prices since the announcement of the joint venture in March, these companies will only see further success once the merger is finalized. Clearly, the companies involved in this joint venture are perceived to benefit significantly compared to their main competitor Archer Daniels, which is left struggling. Now is the time to invest in ConAgra Foods and CHS.
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Nadine Gibson 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!