What the numbers say
ConAgra Foods, Inc. (NYSE:CAG) reported revenue of $4.6 billion, 34% higher compared to the same period last year, mainly driven by the acquisition of Ralcorp. Even if we exclude the $1 billion in sales generated due to the acquisition, sales would have surged 6%, which I believe is decent considering what the sector has been undergoing lately. The net income for the quarter came at $192.2 million compared to a net loss of $86.2 million last year. Moreover, excluding one-time items, profit was $0.60 per share, a penny better than analysts’ estimates.
Gross margin was flat while the company’s operating margin declined 30 basis points. Last year, due to drought, there were significant price increases in agricultural inputs, which led to a considerable decline in sales volume, and as the company absorbed increased costs, margins were affected badly. Moving forward, margins should improve as input-cost inflation is expected to be milder in the coming year.
Further, the acquisition of Ralcorp should persistently create operating-cost savings and better margins. ConAgra Foods, Inc. (NYSE:CAG) raised its estimated cost-related synergies from the acquisition to $300 million from the previous estimate of $225 million.
Negative tangible assets
At the moment, ConAgra has a highly levered balance sheet after Ralcorp’s acquisition for $5 billion. In March, the company’s long-term debt stood at $8.7 billion. On the asset side, goodwill stood at $8.45 billion and trademarks and intangibles at $3.4 billion. As a result, ConAgra has a negative tangible book value, with high leverage, that reduces the company’s financial strength.
Striking the best mix
A test that ConAgra’s management faces is how to manage two discrete businesses, a large branded food business along with a large private-label business. The acquisition of Ralcorp means that about a quarter of ConAgra’s revenue will be generated from private labels, a business that is currently facing pricing pressure.
On the branded side, the company appears to be performing better because of improvement in its U.S. market share in many categories. The acquisition of Skippy by Hormel creates a distraction in categories like peanut butter and tomatoes and the acquisition of Heinz should improve chances for ConAgra Foods, Inc. (NYSE:CAG)’s growth in branded products.
What lies ahead?
In the current quarter, ConAgra’s earnings should remain flat due to considerable marketing expenses connected with the introduction of the latest summer products. The company’s commercial foods segment, Lamb Weston potato operations, has lost business from a major food-service customer that has not yet been disclosed. The lost sales will cost ConAgra $0.06 to $0.07 in 2014. For the full year, the company forecasts its earnings at $2.40 per share, below analysts’ average estimate of $2.48 per share.
Can’t overlook these competitors
Kraft Foods Group Inc (NASDAQ:KRFT) is ConAgra’s major competitor and an equally recognized household name in the North American market. Kraft, post its spin-off, is focused on groceries and the markets in North America. While ConAgra’s product mix and acquisition puts it in some uncertainty, Kraft Foods Group Inc (NASDAQ:KRFT) enjoys a stable business with almost assured annual revenue of roughly $19 billion.
