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ConAgra Foods Inc. (CAG - Analyst Report) posted EPS of 50 cents for the third quarter of fiscal 2011, compared with 44 cents in the year-earlier quarter. This improvement reflected lower incentive compensation expense and recent share repurchases.

The results easily beat the Zacks Consensus Estimate of 46 cents. 

Revenues

Net revenues were $3,154.7 million, up from $3,030.5 million in the year-earlier quarter, representing an increase of 4.1%. Reported revenue was also above the Zacks Consensus Estimate of $3134 million.

The increase in total revenues was due to a 7.4% hike in revenues from the Commercial Foods segment and a 2.5% rise in the Consumer Food segment.

Revenues from the Commercial Foods segment rose on the back of increased prices for flour milling operations coupled with enhanced volumes for Lamb Weston specialty potato products. The growth in revenues from Consumer Foods segment includes the favorable impact of acquisitions.

Margins

As a percentage of revenues, cost of goods sold (COGS) and SG&A (selling, general and administrative) remained static from the year-earlier quarter. Corporate expenses were $26.0 million, down from $88.0 million during the same period of the previous year based on lower incentive compensation expenses during the quarter.

Operating margin was 13%, down from 15% in the year-earlier quarter. The fall in margin is attributed to a 2.2% decrease in Commercial Foods segment’s operating profit and a 14% decrease in Consumer Foods segment’s operating profit.

At the end of the quarter, operating cash flows dropped to $939.9 million from $1,106.5 million at the end of third quarter of fiscal 2010. During the quarter, ConAgra spent $136 million as capital expenditures for property, plant and equipment compared with $120.0 million in the year-earlier quarter and paid a total dividend of $100 million compared with $89 million in the year-earlier quarter. During the quarter, ConAgra repurchased 21.4 million shares for $490 million.

Management stated that ConAgra’s results improved in the quarter even though there were obstacles such as high input cost inflation and other unfavourable economic conditions.

Outlook

For 2011, ConAgra expects a low-single-digit EPS growth over the fiscal 2010 EPS of $1.74, which includes the impact of pricing actions, strong supply chain savings, improved potato crop quality, lower incentive compensation costs, share repurchases, and contributions from innovation and recently acquired businesses.

The highly-competitive food industry and extremely volatile commodity prices are matters of prime concern. ConAgra’s direct competitors are HJ Heinz Co. and Kraft Foods Inc. .

We continue to maintain a Neutral recommendation on ConAgra. However, while we are encouraged by strategic moves of acquiring profit-making and divesting loss-making units, we currently have a Zacks #4 Rank (short-term Sell rating) on the stock as we believe that the competitive food industry puts a downward pressure.

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