ConAgra’s New Course Is Exactly What CAG Stock Needs (CAG)

ConAgra (CAG) is the latest big-name stock to bow to at least some of the wishes of an activist investor, and it’s probably just as well, because something has to break CAG stock’s record of long-time underperformance.

cag stock, ConAgra Foods (NYSE: CAG)As part of the ConAgra earnings release, the packaged-food company said it is getting out of the private-label food business. That’s an abrupt about-face for a company that just three years ago spent $5 billion to acquire Ralcorp.

It looked like a canny move at the time. The experience of the recession led large numbers of consumers to forgo pricier premium brands and opt for cheaper store-brands instead.

As the owner of Chef Boyardee, Wesson Oil and Peter Pan peanut butter — among a wide portfolio of other premium brands — CAG’s Ralcorp acquisition looked like a way to recapture market share lost to private-label alternatives.

Unfortunately, the acquisition turned out to be a dud. Private label is a low-margin business to begin with — and it’s not like CAG was the only company to get in on the act. Furthermore, consumers are increasingly turning away from packaged food.

With too many private-label offerings chasing a diminishing market, the Ralcorp became an albatross. As CAG’s new CEO Sean Connolly said in a press release:

“As I have intensely studied the situation in our private brands operations over the last few months, it has become clear that the time and energy the company is devoting to the Private Brands turnaround represent a suboptimal use of our resources.”

At Last, a Reason to Hang On to CAG Stock

Private labels certainly have been a suboptimal use of resources. ConAgra also vastly overpaid, judging by the $2 billion in charges CAG has taken as a consequence of the Ralcorp acquisition.

Those kind of mistakes give an activist investors like Jana Parters a huge cudgel with which to beat management. The hedge fund was only too happy to wield it.

As a shareholder with a stake of more than 7% in CAG stock, Jana has already forced the company to bring in a new CEO and pursue a new strategic direction. Under its influence, the Ralcorp exit looks like the beginning of a process where CAG will relieve itself of lower-margin operations and brands. Jana is likewise calling for CAG to replace its board of directors for having bungled the Ralcorp deal.

As noted above, this is good news for anyone who holds CAG stock. After all, ConAgra stock has consistently lagged the broader market throughout a bull market that’s now more than six years old. True, for the year-to-date, CAG stock is up more than 20%, but that’s entirely a reaction to Jana Parters shaking things up.

Against that backdrop, the market doesn’t much care about ConAgra earnings from the last quarter, but they were okay nonetheless. CAG swung back to a profit from last year’s loss, and adjusted earnings per share of 59 cents matched analysts’ average estimate. Revenue even improved 3.7% to $4.1 billion.

The only news that matters to CAG stock at this point is what the rest of its strategic change of course is going to look like.

The company says it will update investors at a special presentation later this year. If nothing else, ConAgra gave investors a reason to hold onto CAG stock at least until that time.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/conagra-cag-stock-earnings/.

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