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We recently upgraded our recommendation on ConAgra Foods, Inc. (CAG - Analyst Report) from Underperform to Neutral, expecting the company to perform in line with the broader market in the next 6–12 months.

Why the Upgrade?

ConAgra is one of North America’s leading food companies, serving grocery retailers, restaurants and other foodservice establishments. The company’s brands are found in roughly 97% of America’s households. The company has delivered a year-to-date return of 13.9%.

We find the long-term growth aspects of ConAgra to be bright and thus anticipate the company to grow its earnings by 8.7% in the next 5 years while year-over-year growth is predicted to be 8.7% and 10.5% for fiscal 2014 and 2015, respectively.

Acquisitions have played an integral part in ConAgra’s growth over time. The recent acquisition of Ralcorp is worth mentioning in this regard. These assets are expected to contribute 25 cents to earnings per share in fiscal 2014 and yield synergies of $300 million by 2017. Besides acquisitions, ConAgra’s joint venture, the Ardent Mills, between Cargill Inc. and CHS Inc, will boost the company’s customer supply chain solutions, efficiency, innovation capabilities and profits.

Also, ConAgra’s financial results for the second quarter of fiscal 2014 were impressive. Adjusted earnings per share increased 9% year over year to 62 cents. Revenues were $4.7 billion, up 26.5% year over year driven by solid contribution from the Ralcorp acquisition.

Considering these positives, we have upgraded ConAgra from Underperform to Neutral. However, our upgrade was restricted to a Neutral view due to the loss of an important customer in the Lamb Weston Potato business. Also, ConAgra is exposed to fluctuations in raw materials prices along with supply-demand inconsistency. The presence of many players in the industry has reduced the company’s control and increased pricing pressure.

In the last 30 days, the Zacks Consensus Estimate for ConAgra has grown by 0.4% to $2.35 for fiscal 2014 and to $2.60 for fiscal 2015.

Other Stocks to Consider

ConAgra Foods, Inc. currently has a $14.2 billion market capitalization and carries a Zacks Rank #2 (Buy).

Other stocks worth considering in the industry include The Chefs' Warehouse, Inc. (CHEF - Snapshot Report), Inventure Foods, Inc. (SNAK - Snapshot Report) and Kraft Foods Group, Inc. (KRFT - Analyst Report). All the three companies also carry a Zacks Rank #2 (Buy).

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