ConAgra Foods yesterday (20 December) booked a jump in first-half profits and raised its full-year earnings forecast. The growth was a result of a series of small acquisitions made by the US group this year. Analysts gave an overall positive reaction to the results but some raised caution about the outlook for the company, particularly around its plan to buy private-label rival Ralcorp Holdings.
Morningstar analyst Erin Lash
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“ConAgra has been active on the acquisition front over the past year and it shows, as second-quarter results were propped up by five recently completed deals and results exceeded consensus estimates – reported earnings of $0.57 per share outpaced the market’s expectations of $0.55. We applaud the company’s efforts to build out its private-label business as well as its international platform, but volatile commodity costs and challenging economic conditions continue to present sizeable headwinds, and we think ConAgra’s portfolio of second- and third-tier brands will remain an Achilles’ heel for some time. However, the acquisition of Ralcorp makes strategic sense, from our view, as it extends the packaged food firm’s offerings beyond its lackluster brand portfolio and positions it to benefit as consumers opt for lower-priced products and retailers increasingly tout value offerings, despite the lofty price tag ConAgra is to pay (a sweet 12 times the private-label manufacturer’s fiscal 2012 adjusted EBITDA on an enterprise value basis).”
Jonathan Feeney, analyst at Janney Montgomery Scott
“At 9.3x estimated 2013 EV/EBITDA, ConAgra trades at a 13% discount to the group, lower than its historical 10% discount despite comparable (at least) earnings visibility and in line domestic volume trends. We think the market has failed to recognise ConAgra’s vast business improvements (volumes, returns) due to its above-average exposure to and focus on the sluggish US market. Ironically, we believe this US focus offers better visibility than what’s priced in. Our $36 fair value estimate is derived using a 9x EV/EBITDA multiple on our FY14 (May) forecast, noting ConAgra’s free cash profile improves with the addition of Ralcorp and remains the most attractive in packaged food.”
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Barclays Capital analyst Andrew Lazar
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By GlobalData“ConAgra reported F2Q13 EPS of $0.57, $0.02 above the Street estimate of $0.55. Total sales grew 9% year-on-year in the quarter, modestly above the consensus estimate of 8.2% year-on-year. In the consumer segment, organic sales were flat year-on-year, with a 4% increase in price/mix offset by a 4% volume decline. Segment operating profit increased 8%, based on favourable price/mix, moderating inflation and a contribution from recent acquisitions. ConAgra raised its FY13 EPS guidance and now expects to deliver “at least” $2.06 in the full-year, versus its prior expectation for a range of $2.03-$2.06 (both of which exclude the impact from the pending Ralcorp acquisition). Other FY13 guidance items include interest expense of $215m and a full-year tax rate that the company anticipates will be “approximately” 34%.”
Stifel Nicolaus analyst Chris Growe
“We believe ConAgra will encounter a higher level of risk associated with integrating Ralcorp’s business and we also see some risk around operating both a branded and private label business under the same roof. As such, while the EPS accretion surrounding this transaction is attractive and should support even some modest upside potential for the shares, we also take a somewhat more cautious approach around the company’s ability to manage this business and its inherent volatility. We do not believe Ralcorp and a larger presence in the private-label food industry will lead to an increase in ConAgra’s sales and earnings growth rate.
“While we believe ConAgra will continue to acquire and build its presence in the private-label food industry, we do not believe the underlying or organic growth rate of its business will expand from the current 6%-8% EPS growth rate the company currently estimates. While the company’s use of the balance sheet has been important in driving earnings growth, the activity will likely slow down as the company digests the Ralcorp acquisition and uses its free cash flow to pay down debt. We need to see an improving rate of underlying growth for the business before getting more comfortable with a more positive tone on the shares.”
