On Jul 4, we reiterated our Neutral recommendation on the food products company, ConAgra Foods, Inc. (CAG - Analyst Report), based on its top- and bottom-line growth. However, we are cautious about ConAgra’s Commercial Foods segment, going forward.
Why the Reiteration?
ConAgra’s earnings in fourth quarter of fiscal 2013 were 60 cents, increasing 17.6% year over year. Revenues for the quarter jumped 33.7% year over year to $4.6 billion. The results reflect positive contribution from its acquired assets and strong performance of its Consumer Foods segment.
The Ralcorp acquisition, undertaken in January this year, has been a significant contributor to the revenues. Once the integration is complete, Ralcorp is expected to drive the synergies further. The cost synergies are expected to reach $300 million by fiscal 2017.
The Consumer Foods segment is expected to grow further in the quarters ahead, driving ConAgra’s business further. Moreover, ConAgra expects to use the proceeds from its new joint venture, Ardent Mills, to repay the debt incurred for the Ralcorp acquisition. The reduction in debt will improve the company’s leverage ratios, in turn enhancing shareholders’ value.
However, ConAgra’s Commercial Foods segment is not performing as was expected, pulling the growth in revenues down. The segment is likely to remain in doldrums in the coming quarters due to the loss of a major customer in the potato business.
Also, the product launches in the segments call for higher advertising expenses, increasing the overall expenses for the company. Rising prices of raw materials used by ConAgra also temper our outlook on the stock.
Other Stocks to Consider
ConAgra currently carries a Zacks Rank #3 (Hold). Other stocks worth a look in the industry are B&G Foods Inc. (BGS - Snapshot Report) and Flowers Foods, Inc. (FLO - Snapshot Report), both carrying a Zacks Rank #1 (Strong Buy). Another company, Campbell Soup Company (CPB - Analyst Report) carrying a Zacks Rank #2 (Buy), is worth a look.