Consumer Analysts Group of New York (CAGNY) is a good platform for companies to meet analysts and convey their performance every year. For 42 years, this group has brought companies closer to their investors. In February, CAGNY organized this year’s annual gathering where many FMCG giants ran their presentations.
Taking into consideration the disclosures made during this meet, I decided to analyze three stocks from this industry — ConAgra Foods, Inc. (NYSE:CAG), Campbell Soup Company (NYSE:CPB), and Kraft Foods Group Inc (NASDAQ:KRFT) in this article. Let’s discuss each of them in detail.
ConAgra Foods
At CAGNY’s, ConAgra announced that it has completed the acquisition of Ralcorp Holdings. This acquisition will generate $0.05 EPS in fiscal 2013. It is also expected that Ralcorp should contribute about $400 million to ConAgra’s bottom line in fiscal 2014. Apart from this, the cost synergy from the acquisition in fiscal 2014 may be about $27.5 million, which should reach $225 million in the next four years.
The savings should come from an optimized supply chain, as well as leveraging corporate overheads. Through this acquisition, ConAgra will be able to transform its product portfolio into a more balanced one, with more contribution from private-labeled food (one-quarter of its total revenue).
Apart from this, ConAgra Foods, Inc. (NYSE:CAG) recently announced an agreement to combine its milling assets into a new joint venture with Cargill and Chico’s FAS, Inc. (NYSE:CHS) called Ardent Mills. ConAgra will hold 44% share in the venture. The venture’s expected annual sales will be about $4.3 billion, which is more than twice the sales of the company’s existing milling business.
Although, as a result of the transaction, around $1.8 billion in sales will move from ConAgra to the joint venture, which may result in a dilution of $0.05 in the EPS for fiscal 2014. But, the JV plans to distribute approximately $900 million to its owners after the transaction is closed in late 2013.
I see this transaction as a positive step for the company, as ConAgra gets liquidity in the short-run and gets to dispose-off a business that was volatile in terms of sales and earnings. Moreover, this move could reduce some of the volatility even in the company’s cash flow, because of the elimination of the working capital demands of the milling operations.
Campbell Soup
In its presentation, Campbell made it clear that from now on, the company’s focus will be more towards expansion into higher-growth areas with new customers and geographies, as well as innovation in its product line.
With the same aim, it recently entered into an agreement with Grupo Jumex and Conservas La Costeña to increase its global presence. Grupo will be responsible for producing the company’s V8 product line in the Mexican market, and Conservas will make and distribute the company’s soup, broths, and sauces in the region.
In addition, Campbell has announced that it will introduce 216 new products in fiscal 2014. Most of these new products will be an addition to its pasta sauces, beverages, and Bolthouse Farms product lines.
The global expansion and new products in its portfolio may look tempting, but after a closer look, I found some issues. Firstly, the reduced advertising may improve short-term profitability, it could bring down the brand image, which will be difficult for the company to revive.
Secondly, it seems convincing that the agreements with Grupo and Conservas are a good example of how the company can use external help to gain good scale in international markets. But, I feel that the results will only be visible in the long-term as Campbell Soup Company (NYSE:CPB)’s current exposure in the country is limited. The brand will require some time to reach the required heights.
The global initiatives and new product launches by the company are steps in the right direction, but the results of low advertising expenditure and the delayed positives of the expansion lead me to remain Neutral on the stock for now.
Kraft Foods
This year’s annual meet at CAGNY was the first one for Kraft Foods Group Inc (NASDAQ:KRFT) post its spin-off. According to the presentation, the company is undergoing lots of changes in its approach towards innovation and investment. Its new focus is on 10-15 big platform bets, supported by ample investment.
This means from now on, Kraft Foods Group Inc (NASDAQ:KRFT) will introduce and remain focused on a few number of products rather than introducing a large number of products every year. Kraft is shifting its innovation and investment toward ‘big bets’ that expand their respective categories to satisfy a broader range of consumer needs. Initial attempts with products like Velveeta Skillets, MiO, and Oscar Mayer are now paying off. They have grown to roughly $100 million businesses in a relatively short period.
Kraft Foods Group Inc (NASDAQ:KRFT) has some more products that have potential and can be a part of the big bet strategy. These products include large brands like Kool-Aid and JELL-O. These are already large businesses, with Kool-Aid generating over $100 million and JELL-O making over $500 million in sales annually.
However, since the company’s focus turned towards building the snacks business in the last decade, sales of these iconic brands stalled as cash flows were shifted to fund the snack brands. But now, after the spin-off, Kraft can now focus on raising back these brands to reach their true potential.
Additionally, the company’s cost saving plan through improved productivity also seems to be on track. In the last reported quarter, it helped the operating margins grow slightly. The productivity and cost savings initiatives could generate an incremental $0.45 per share over the next several years. However, investors should be cautious about the increased restructuring charges this year, as mentioned earlier in the company’s guidance.
The takeaway
Presentation at CAGNY’s annual gathering brought some clarity about the future of all these three companies. Ardent Mills, the joint venture of Cargill and CHS with ConAgra Foods, Inc. (NYSE:CAG), has the potential to generate more than twice the current sales of the company’s mills, while Ralcorp’s cost synergies and strong product base should give a required boost to the company’s profitability.
Kraft Foods Group Inc (NASDAQ:KRFT) will concentrate its funds towards fewer products to achieve better results. Its cost saving plans also gives some upside to the stock. Both the stocks seem strong in the future with their respective endeavors, and therefore, they give a bullish vibe.
As for Campbell Soup Company (NYSE:CPB), its strategy of global and portfolio expansion seems the right thing to do, but the reduced advertising expenses coupled with delayed growth in Mexico makes me remain Neutral on the stock.
Madhu Dube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
