This Food Giant Can Make Your Portfolio Fat
usha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the markets experiencing volatility, investors who are looking for stability and long term gains can invest in the consumer food industry. One of my all-time favorites is ConAgra (NYSE: CAG), one of the largest U.S.-based food companies with famous product lines like Healthy Choice, Slim Jim, Peter Pan, and Swiss Miss. The company has faced a lot of criticism over the last few years because of pathetic growth compared to its peers. However, with the company's release of an impressive fourth quarter earnings report, I feel this is the right time to invest in this stock. Below, I have listed three reasons that make ConAgra a good buy.
Impressive earnings report
The company reported a net income of $192.2 million, or $0.45 per share, as compared to the loss of $86.2 million, or $0.21 per share, reported for the same quarter last year. Consumer sales increased by 7%, with the Ralcorp deal contributing around $962 million to the sales. The company generated revenue of $4.59 billion, an increase of around 33.81%, as compared to the $3.43 million revenue in the same quarter last fiscal year. The operating profit came in at $554.5 million (including the Ralcorp operating results), as compared to the operating profit of $407.5 million, in the fourth quarter last year.
Benefits from the Ralcorp deal
ConAgra struck a deal to buy the private label food producer, Ralcorp, in November 2012 for $5 million. Ralcorp products include pasta, cereals, snacks, sauces, and frozen bakery products. The companies value the transaction at about $6.8 billion, when debt is included. ConAgra plans to finance the acquisition mostly with available cash, existing credit facilities, and new borrowings. ConAgra CEO, Gary Rodkin, said that private-label products are growing at twice the rate of name brands and now accounts for 18% of the overall packaged food market. The private label food business is very fragmented and the diverse list of Ralcorp's products provides ConAgra with tremendous business opportunities to grow. The company has raised its cost savings estimate to $300 million by 2017 from the previous estimate of $225 million. The Ralcorp acquisition has generated $1 billion in sales for ConAgra. Even though ConAgra had tried the acquisition many times before in the last fiscal year, the deal has been worth the wait.
ConAgra vs. peers
With a dividend yield of 2.8%, as compared to the industry average of 2.4%, ConAgra has been a shareholder-friendly company. The company has constantly increased its dividend payout since 2008. There have been other key players in the food industry like Nestle (NASDAQOTH: NSRGY), Unilever, and Kraft (NASDAQ: KRFT). The table below shows a comparison between ConAgra and its peers:
Nestle is the largest food company in the world, both in terms of market cap and revenue. It has a diverse product line that includes baby food, chocolate, ice cream, coffee and tea, bottled water, etc. Some of its popular brands are Nescafe, Haagen-Dazs, Gerber, and Hot Pockets. Even though Nestle pays a slightly better dividend yield of 3.2% as compared to ConAgra’s 2.8%, it is currently trading at a higher P/E, PEG, and P/S multiple as compared to ConAgra, which makes ConAgra better valued than Nestle. The quarterly revenue growth of Nestle is also lower than ConAgra. Moreover, ConAgra has immense potential to diversify its business globally and increase its growth, whereas Nestle has almost no scope to grow as it has already capitalized upon its international diversification.
Kraft has also been one of ConAgra’s major competitors. Kraft is the ex-parent of Mondelez and post its spin-off, it has been focusing on grocery markets in North America. Kraft has a higher debt-to-equity ratio of 2.66, as compared to ConAgra’s 2.07. With a trailing P/E ratio of 20.63, Kraft is the most expensive among the three companies. Also, the market values Kraft at 17.4 times its forward earnings, as compared to ConAgra’s 12.8. Although Kraft provides a better dividend yield of 3.7%, it is looks expensive to me.
Foolish bottom line
After the Ralcorp acquisition, ConAgra has a net debt of around $9.2 billion and a negative tangible book value of $6.5 billion. In spite of being highly leveraged, ConAgra looks attractive to me. It is relatively cheap compared to its peers and has great potential synergies from the Ralcorp acquisition. With an impressive earnings report, ConAgra has strengthened its position in the food industry. I am bullish on this stock and the returns from this stock should definitely make your portfolio fat!
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