ConAgra Foods: Buy for Defense Only

by Dan Burrows | December 27, 2012 10:31 am

Wheeling and dealing sure is paying off for packaged-food giant ConAgra (NYSE:CAG[1]), but whether that can translate into outperformance for a stock that’s been a laggard very much remains to be seen.

ConAgra, whose portfolio of brands includes Hunts, Chef Boyardee and Healthy Choice, recently beat Wall Street’s fiscal second-quarter earnings estimate and raised its full-year outlook, largely thanks to a host of acquisitions.

The company has certainly been busy on the deal front. In the last year, ConAgra bought Unilever (NYSE:UL[2]; NYSE:UN[3]) North America’s frozen meals business, pita-chip company Kangaroo and Odom’s Tennessee Pride, which makes breakfast sandwiches and sausages.

But the biggest prize yet was landed just last month, when ConAgra struck a $5 billion deal for Ralcorp (NYSE:RAH[4]), the nation’s biggest maker of private-label foods, which stores sell under their own brands.

Tepid economic growth and persistently high unemployment make the Ralcorp deal look like a no-brainer. For years now, cash-strapped shoppers have been opting for cheaper store-label foods, often at the expense of ConAgra’s own national and international brands.

Sure, the margins are thinner on lower-cost private-label goods — but, hey, it’s better than losing the entire sale to a competitor.

And happily for ConAgra, it saw strong growth in its branded consumer foods business in the most recent quarter, anyway — albeit, due more to acquisitions than any increase in volume, or number of units moved. The consumer business, which contributed 63% of all sales for the year-to-date, posted an 11% gain in quarterly sales.

However, that was driven by an 11% contribution from acquisitions. Volume actually declined 4%.

It also helped greatly that input costs have come down substantially. In just the last quarter, futures for oats, corn, sugar, soybeans and wheat have fallen anywhere from 2.7% to 10%.

Those costs, of course, are unpredictable and largely out of ConAgra’s control. Long-term profit growth is tied to acquisitions, and with the Ralcorp deal, the company is stepping to the sidelines for now. Management said it won’t be looking for more big deals for “a while,” as ConAgra digests the $5 billion acquisition.

Here’s hoping the Ralcorp execution goes smoothly and delivers the intended benefits, because shareholders could use it. Yes, ConAgra’s stock is up nearly 12% for the year-to-date, but that still lags the broader market by more than a percentage point. And while it has more than doubled since the bear-market bottom of 2009, CAG still trails the S&P 500 by about 8 percentage points over that period.

It’s not that ConAgra hasn’t generated good total returns — it just hasn’t been beating the market. And there’s no sense in stock-picking if you can’t generate outperformance versus an index.

With its 3.4% dividend yield and low correlation to the S&P 500, ConAgra might have a place in the defensive, equity-income part of your portfolio. But if you’re looking to juice returns in an up market, CAG hasn’t been that kind of stock.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

  1. CAG:
  2. UL:
  3. UN:
  4. RAH:

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