ConAgra Foods: Buy for Defense Only

It's up but trails the broader market, so why jump in now?


By Dan Burrows, InvestorPlace Feature Writer

Dec 27, 2012


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


ConAgra, whose portfolio of brands includes Hunts, Chef Boyardee and Healthy Choice, recently beat Wall Streetís 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; NYSE:UN) North Americaís frozen meals business, pita-chip company Kangaroo and Odomís 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), the nationís 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 ConAgraís own national and international brands.


Sure, the margins are thinner on lower-cost private-label goods ó but, hey, itís 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 ó 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 ConAgraís 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 wonít be looking for more big deals for ďa while,Ē as ConAgra digests the $5 billion acquisition...