ConAgra Foods, Inc. (CAG): This Food Giant Looks Quite Appetizing

Since July 2012, ConAgra Foods, Inc. (NYSE:CAG) has experienced quite a good gain on the market, rising from $24.30 per share to more than $35 per share. It has also risen by more than 5% in one trading day, after it reported an impressive fourth quarter earnings results. Is ConAgra a good buy after strong fourth quarter earnings? Let’s find out.

Impressive fourth quarter earnings results

In the fourth quarter, ConAgra Foods, Inc. (NYSE:CAG) generated nearly $4.6 billion in revenue, an impressive growth of 33.7% compared to the revenue of $3.43 billion in the fourth quarter last year. While the Consumer Foods and Commercial Foods segments experienced sales increases of 7% and 3.5%, respectively, the significant growth in revenue was due to the inclusion of $962 million in the revenue of Ralcorp Food and Ralcorp Frozen Bakery Products. Including Ralcorp operating results, the operating profit came in at $554.5 million, 36.1% higher than the operating profit of $407.5 million in the fourth quarter last year. The net income was $192.2 million, or $0.45 per share, a significant improvement compared to the loss of $86.2 million, or a loss of $0.21 per share last year.

High leverage with negative tangible book value

The company’s CEO Gary Rodkin felt bullish about the recent operating results, he said: “We are pleased to have driven a 17% increase in comparable EPS for fiscal 2013, and to have posted comparable year-over-year Consumer Foods volume growth in the fiscal fourth quarter as planned.” After Ralcorp’s acquisition, ConAgra Foods, Inc. (NYSE:CAG) increased its leverage level significantly. As of March 2013, it had $5.36 billion in equity, $183.9 million in cash and nearly $8.7 billion in senior long-term debt. It also booked $185 million in notes payable and $517.9 million in current installments of long-term debt. Thus, the net debt amounted to more than $9.2 billion. The goodwill, trademarks & intangibles also rose significantly. In March 2013, it had more than $8.45 billion in goodwill and more than $3.4 billion in brands and trademarks and other intangibles. Consequently, ConAgra Foods, Inc. (NYSE:CAG) had a negative tangible book value of nearly $(6.5) billion.

Relatively cheap compared to its peers

What I like about the company is its relatively low earnings valuation. At $35 per share, ConAgra Foods, Inc. (NYSE:CAG) is worth $14 billion on the market. The market values ConAgra at nearly 12.8 times its forward earnings. Compared to its peers Kraft Foods Group Inc (NASDAQ:KRFT) and Mondelez International Inc (NASDAQ:MDLZ), it has the lowest valuation among the three. Kraft Foods is trading at $55.30 per share, with a total market cap of $32.9 billion. The market values Kraft Foods as the most expensive, at 17.4 times its forward earnings. Mondelez also has a higher valuation. At $29.10 per share, Mondelez is worth $52 billion on the market. It is valued at more than 16.9 times its forward earnings.

Kraft Foods is the ex-parent of Mondelez. The spinoff of Mondelez International Inc (NASDAQ:MDLZ) separates the two businesses with different focuses. While Kraft Foods Group Inc (NASDAQ:KRFT) concentrates on the mature North American grocery business, Mondelez’s main battlefield is emerging markets including Brazil, China and India. Consequently, Kraft Foods pays a higher dividend yield at 3.7%, but it is the slower growth business. Mondelez, with 45.4% of the total revenue coming from developing markets, has a much higher growth potential, but it offers a lower dividend yield at 1.8%. Like Kraft Foods, ConAgra’s dividend yield is also quite juicy, at around 3%.