Frank Little had a little model for his business but that was quality business. Leveraging on quality and brands, ConAgra Foods (CAG, Financial) has emerged as one of the big players in the packaged food market in U.S. Owing to economic and market vulnerabilities, the company went for a seismic shift in its business strategies over the past decades in order to become a popular name across households. The recent results as well as company’s activity show a positive trend of reviving the profit-rich grain mills in Nebraska into one of the biggest prepared and processed food provider globally.
The U.S. economy is finally seeing sustainable growth momentum as evidenced by increasing employment numbers and appreciation of the dollar in the currency market. However, the buying spree has not yet hit the pre-2007 levels, as the indicators are not strong enough to sustain such buying activity. The investors are still conservative and require more progressive indicators of an end to recession gloom.
Shift in the food market
Recently, the Citigroup downgraded the food stocks including ConAgra from buy to neutral due to exposure to global markets as well as high consumerism being already priced in their stocks. The strengthening dollar acts like a double-edged sword as it increases purchasing power of the economy on one hand whereas it decreases the price competitiveness of the international players on the other.
ConAgra has been losing market share to its competitors due to shift in consumer preferences to a more nutritious diet over cereals, which contain high contents of sugar. Recently, Post Holdings (POST, Financial) announced the buyout of MOM Brands of cereal to give US consumers a better variety of cereal for healthy breakfast while General Mills (GIS, Financial) announced that it would launch 50 gluten-free and protein enriched products as a healthier option to the U.S. consumers.
Dissecting the result
The company’s performance was quite dismal for the second quarter of 2015. However, ConAgra Foods is going for some assessed strategies to have better household penetration and downturn all macro-headwinds.
The operating profit (as shown above) was completely dragged down by private brands, which the company is expecting to revive before May 2016.
Though the sales of Consumer Foods Segment declined, it showed a better operational margin mainly because of packaging, assortment, product, and merchandising initiatives. The company also recently teamed up with Laura Vitale, an internet cooking show host where it will share recipes for V-Day meal and consumers after selecting the recipe will be able to cart their relevant ingredients at one click. This is one of the greatest penetration strategies seen by the company.
Sales for the Commercial Foods segment were $ 1.1 billion, up 2% from the prior year period, and segment operating profit was $ 148 million. ConAgra’s Lamb Weston brand, which saw a reduction in the export volume, has partnered with Meijer Frozen Food to expand its potato-processing operations in the country which has been seen as a growth-generating business venture by many due to its estimated positive NPV.
The return on equity showed more downfall than return on invested capital which indicates the cost of equity is decreasing. But looking at the segment level results, the company shows some promising growth keeping in align to its business strategies.
Some of the key highlights of the result were a 90% decrease in EPS primarily because of huge SG&A expense, which included non-cash impairment charges of $ 0.51/ share. The company expects to pay off debt to the tune of $1 billion in the upcoming financial period in order to increase the stockholder’s equity.
Final word
Currently, the stock trades with a forward P/E of around 15.25 as against trailing P/E of about 38; a surge in the earnings can be expected, which indicates this constant dividend payer will give reasonable returns in the future. At the outset even though the company is struggling in retaining its growth momentum, the directional shift by the company surely aims to achieve a higher growth.
