Conagra Brands, Inc. (CAG - Free Report) unveiled that it is evaluating strategic alternatives for the Italian frozen pasta business, Gelit. The company will be assisted by BNP Paribas for reviewing strategic opportunities pertaining to Gelit. Notably, Gelit is a well-known producer of Italian frozen and ready meals, which supplies products to a wide range of international customers. Management has not set a specific deadline or issued any additional details regarding the review process. Let’s take a look at how this latest development might impact Conagra’s business.
Portfolio Refinement to Aid Growth
We believe that Conagra’s efforts to explore alternatives for Gelit are part of its focus to boost competency by reshaping the portfolio through meaningful inorganic moves. In sync with this, the company tries to acquire high-margin generating businesses, while divesting the less profitable ones. In December 2018, Conagra inked a deal to sell Wesson oil brand to Richardson International. Prior to this, the company exited private label brands and non-key businesses including Spicetec and JM Swank and executed Lamb Weston’s (LW - Free Report) spin-off in 2016. Moreover, the company concluded the sale of its Canadian Del Monte processed fruit and vegetable business to Bonduelle Group during the first quarter of fiscal 2019.
While the company is exiting less profitable business avenues, it is also pursuing buyouts to enhance business strength. On this front, Conagra completed the acquisition of Pinnacle Foods in October 2018. Notably, the combined giant is likely to be the second largest player in the frozen foods space. The consolidation of these food companies is likely to create a robust portfolio of leading, iconic and on-trend brands, which will help the combined entity ramp up innovation and exploit long-term benefits in the frozen foods space. The companies’ complementary portfolios, cultures and supply chain are likely to ease Pinnacle Foods’ integration into Conagra, which has a solid buyout record. Clearly, this combination is likely to be a deemed fit, especially at a time when demand for the frozen foods and snacks category is rising.
In previous instances, the company acquired Angie's Artisan Treats, LLC (in October 2017), which is strengthening the snacking business. The buyout of Sandwich Bros (completed in February 2018) is also boosting the frozen business. In fact, contributions from Angie's BOOMCHICKAPOP and the Sandwich Bros. buyout aided Conagra’s second-quarter sales growth by about 200 basis points (bps).
That said, we expect that the company’s intentions to review options for Gelit will enable Conagra to gather the necessary resources for undertaking growth-oriented investments.
Will Efforts Revive Stock?
Conagra is battling escalated input costs like many other food companies that include Campbell Soup (CPB - Free Report) and General Mills (GIS - Free Report) among others. During the second quarter, the company witnessed input cost inflation of nearly 2.9%. Notably, the company saw a rise in transportation and warehousing expenses. Higher costs of packaging and certain ingredients weighed on gross margin in the said period. Well, the company anticipates input cost inflation to be 3.0-3.2% in fiscal 2019, which is a threat to margins. Apart from this, sales in the Foodservice segment are witnessing year-over-year declines for four straight quarters due to soft volumes. These headwinds have weighed on investors’ sentiments. This is evident from this Zacks Rank #4 (Sell) stock’s 39.2% plunge in the past six months compared with the industry’s decline of 7.7%.
Nevertheless, we believe that the company’s portfolio refinement efforts are likely to provide cushion to the aforementioned hurdles. Going ahead, such endeavors should help the company raise investors’ confidence.
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