ConAgra Foods (CAG) is giving investors indigestion today, with the stock off about 7%. Yet today’s drop may represent a buying opportunity, especially for those who have a long-term perspective.
But first, let’s take a look at what has caused the recent drop in the stock — that is, the lukewarm ConAgra earnings.
In the latest quarter, the company eked out revenue growth of 1.1% to $2.79 billion, but the company posted a net loss of $1.24 billion. The net loss translated to $2.85 per share, compared to a profit of $1.12 per share in the same period a year ago.
After accounting of one-time items and the impact from discontinued operations, the adjusted earnings came to 45 cents per share.
The results were mixed when compared to Wall Street expectations. While the company beat on earnings by 5 cents per share, there was a big-time miss on revenues, which was the main reason CAG stock tanked. Consider that the consensus estimate was expecting a much more robust $3.69 billion in revenues.
The volatility of ConAgra shouldn’t be a surprise. After all, the company is in the midst of a wrenching transformation as it plans to sell its private-label business, which it purchased for the lofty price of $5 billion back in 2013.
Unfortunately, the deal proved to be a poor fit, and integration issues were no help. Besides, CAG had to deal with relentless pricing pressures from customers like Costco (COST) and Trader Joe’s.
CAG Stock Still Working on Turnaround
Yet the decision to sell the private-label business is a clear sign that CEO Sean Connolly, who took the helm in early April, is serious about taking bold moves to get CAG back on track. Of course, another key factor is that the company has activist investor Jana Partners as a 2.7% holder of the stock. The firm has long history of agitating companies to focus much more on shareholder value.
But it appears that Connolly may take additional moves, such as the sale of other underperforming divisions. He has also made it clear that he wants to move into higher-growth categories like organics, and that aggressive cost cutting is part of the company’s future.
This is not idle chatter, either. When it comes to restructurings, Connolly has a good track record. After all, he had a successful stint as the CEO of Hillshire Brands, which he sold last year to Tyson Foods (TSN) for the premium valuation of $8.5 billion.
Meanwhile, CAG has an assortment of iconic brands, including Chef Boyardee, Healthy Choice, Hebrew National, Hunt’s, Orville Redenbacher’s, PAM and Slim Jim.
Besides, CAG stock is trading at a reasonable valuation, with a forward price-to-earnings ratio of about 16. By comparison, General Mills (GIS) and Campbell Soup Company (CPB) both sport a multiple of roughly 18. CAG stock also has a decent dividend yield of 2.5%.
So, while the latest earnings report was a disappointment, there is much to be enthused about. Connolly has shown that he knows how to streamline operations and get strong returns for shareholders. The same goes for Jana Partners.
More importantly, CAG has a great set of brands that should continue to generate stable cash flows, allowing some comfort to allow for the necessary steps to get the company on the right track.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
