In this article, let's take a look at ConAgra Foods, Inc. (CAG, Financial), a $14.41 billion market cap company that is one of the larger U.S. food companies, with a number of widely known brands.
Acquisition and divestiture strategy
ConAgra is one of the larger U.S. food companies and operates through four segments: Consumer Foods, Commercial Foods, Ralcorp Food Group and Ralcorp Frozen Bakery Products. The company´s top 15 brands each generate more than $100 million in annual sales. However, ConAgra doesn´t have a big pricing power as consumers can shift to lower-price products. The fierce competition across the landscape will persist as consumer spending remains constant.
Since 2011, the company has made 7 acquisitions. The largest one, with a cost of more than $5.1 billion, was Ralcorp Holdings, Inc. (RAH), a leading producer of private-brand foods and food service products. Due to the acquisition, the retailer will be the largest private label packaged food company in the U.S., creating a leading private-label firm with $18 billion in consolidated annual sales. Further, cost synergies will come soon; $300 million are forecasted by fiscal 2017.
ConAgra has focused on operational improvement in order to generate profitable sales growth, while augmenting profit margins. The strategies were reducing costs in the company's supply chain and reducing general and administrative expenses.
Further, efforts in marketing and innovation investments were made and will continue in the future in order to improve sales. It has been investing hard. Two objectives are product innovation ($93 million) and marketing support ($474 million). For example, ConAgra's Healthy Choice frozen Greek yogurt is a consequence of this philosophy.
Cash dividends
Since 1976, ConAgra has a dividend policy showing its commitment to returning cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 2.95%, which is considered high enough to protect investors' purchasing power.
Revenues, margins and profitability
Looking at profitability, the decline in revenue led earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.25 vs $0.30). During the past fiscal year, the company reported lower earnings of $0.65 versus $1.87 in the previous year. This year, Wall Street expects an improvement in earnings ($2.27 versus $0.65).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| CAG | ConAgra | 11.71 |
| KRFT | Kraft Foods Group Inc. | 44.93 |
| NSRGY | Nestle SA | 15.19 |
| K | Kellogg Company | 56.94 |
| MJN | Mead Johnson Nutrition Co | 189.69 |
| Â | Industry Median | 8.79 |
The company has a current ROE of 11.71% which is lower than its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels, Nestle (NSRGY, Financial) could be the option. And for investors looking at higher levels, Kraft Foods Group Inc. (KRFT, Financial), Kellogg (K, Financial) or Mead Johnson Nutrition (MJN, Financial) are the right bets. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 22.8x, trading at a premium compared to an average of 22.2x for the industry. To use another metric, its price-to-book ratio of 2.55x indicates a premium versus the industry average of 1.94x while the price-to-sales ratio of 0.84x is below the industry average of 1.07x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,433, which represents a 13 % compound annual growth rate (CAGR).
Final comment
We still think the deal with Ralcorp was a great strategic move considering that it is an effective way to leverage its existing manufacturing platform. Spending money on innovation and marketing strategies seem to be a good way to differentiate of the intense competitive landscape. Finally, ConAgra should benefit as consumers switch for lower-price products.
Hedge fund gurus like David Dreman (Trades, Portfolio), Brian Rogers (Trades, Portfolio), Jeff Auxier (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), John Keeley (Trades, Portfolio) and John Buckingham (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc.
Disclosure: Omar Venerio holds no position in any stocks mentioned
