So far this year, ConAgra (NYSE:CAG) has posted a nice performance for shareholders, with a gain of 13.6%.
Yet based on last week’s earnings report, there are certainly some issues. As should be no surprise, the company is continuing to feel the pain of rising commodities prices. In fact, it believes this will continue throughout the rest of the year. If so, margins will certainly be crimped. Despite all this, ConAgra has taken swift actions to deal with the headwinds.
But are they strong enough to keep shareholders interested? Let’s take a look at the pros and cons:
Pros
Solid brands. ConAgra has a variety of products for categories like meals, condiments, snacks and deserts. Some of its brands include Banquet, Wesson, Marie Callendar’s, Chef Boyardee and Hunt’s.
The company also has a business-to-business platform, which involves supplying potatoes, vegetables and grain products.
Streamlining. Over the years, ConAgra has worked hard to improve margins. For example, the company has sold off commodity businesses – such as in beef, poultry and pork — and focused on premium brands.
What’s more, ConAgra has made great strides in realizing cost reductions. For fiscal 2010, the company generated about $280 million in savings from the consumer supply chain.
Acquisitions. This has been critical for ConAgra. The company has purchased companies like American Pie as well as various trademarks, such as Marie Callendar’s.
However, the most important deal is ConAgra’s proposed $4.9 billion takeover of Ralcorp (NYSE:RAH), which be a tough fight since the offer was rejected. But RalCorp should be an important boost for ConAgra to move into the private-label market.
Cons
Competition. Yes, it is intense. ConAgra faces big-time rivals like General Mills (NYSE:GIS), Kellogg (NYSE:K) and Kraft (NYSE:KFT). At the same time, retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are also intense competitors, who are focusing more on private-label products.
Inflation. In the latest quarter, ConAgra’s consumer foods division suffered from a whopping 9% inflation rate. This is certainly tough to deal with — true, the company has instituted price increases, but it will not be easy to maintain margins.
Pension obligations. No doubt, these are substantial. So far, the pension is sufficiently funded. But with rock-bottom interest rates and market volatility, there may be higher costs.
Verdict
Inflation is likely to be an ongoing problem. Then again, this is hitting all the players in the consumer goods market.
But ConAgra should see some help over the next six months, since price increases tend to have a lag.
What’s more, ConAgra is a cash cow, with operating cash flow of more than $1.4 billion in its most recent fiscal year. As a result, the company has an enticing dividend of 3.6%.
The pros outweigh the cons for ConAgra’s stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
