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ConAgra Foods, Inc. (CAG): This Company’s New Strategy Should Mean Bigger Profits

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The consumer food business is one that works in both good times and bad, and as such, the large, diversified food companies are one of my favorite investments for stability and long-term appreciation. One of my favorites in the space is ConAgra Foods, Inc. (NYSE:CAG), which is one of the largest U.S.-based food companies with many well-known brands. With the company’s recent move toward private label (AKA “store brand”) offerings, I feel that now is a very opportune time to get into ConAgra before its next leg up.

ConAgra Foods, Inc. (NYSE:CAG)

A Little about ConAgra

ConAgra Foods, Inc. (NYSE:CAG) has an extensive branded food business, with such well-known product lines as Healthy Choice, Chef Boyardee, Slim Jim, Swiss Miss, and Hebrew National, just to name a few. Additionally, the company has a thriving commercial foods business, with products sold to institutional and foodservice companies, such as restaurants.

Recently, however, ConAgra has decided to shift their focus toward more private label products. In January, the company acquired Ralcorp Holdings, a manufacturer of primarily store brand products, whose sales are over $4 billion annually. This deal should benefit ConAgra in a few ways. First, store brand products are generally less expensive, both to make and to buy. This creates the potential to bring a significant number of value-conscious customers to their products.

Also, this acquisition should produce significant cost savings for both private label and brand name products made by the company, as some synergies should be possible as the acquisition becomes more integrated into ConAgra Foods, Inc. (NYSE:CAG)’s existing manufacturing methods. For example, Chef Boyardee canned pasta and store-brand canned pasta could possibly be made on the same equipment, use the same ingredients, etc. I have no idea if ConAgra plans to integrate their canned pasta manufacturing, but my point is that the acquisition of Ralcorp creates hundreds of these kinds of opportunities to run more efficiently.

In total, ConAgra Foods, Inc. (NYSE:CAG) has made seven acquisitions over the past two years, including Unilever (NYSE:UL)’s Bertolli brand and P.F. Chang’s Home Menu business. All of the company’s acquisitions have been strategically done to maximize potential cost savings and manufacturing efficiencies, and to add value to the company’s stable of brands.

Valuation and Value

Speaking of value, ConAgra Foods, Inc. (NYSE:CAG) has been very good about creating some for their shareholders. With an above-average yield of right around 3%, ConAgra has raised the payout every year since 2008, when it divested its commodity trading and merchandising operations. The company also does a great job of creating value in the form of share buybacks, and in fact has reduced the number of outstanding shares by more than 8% since 2009.

ConAgra Foods, Inc. (NYSE:CAG) trades at 15.7 times the current fiscal year’s estimated earnings of $2.15 per share, which are set to be reported on June 27. The consensus calls for this to increase to $2.49 and $2.74 in fiscal years 2014 and 2015, respectively, for a 3 year average annual earnings growth rate of 14.2%, mostly thanks to the increased cost efficiencies that are expected to result from the recent acquisitions. The valuation relative to the company’s expected growth rate looks pretty attractive right now, but let’s take a quick look at what else is out there.

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