ConAgra Foods, Inc. (CAG): This Food Giant Can Make Your Portfolio Fat

With the markets experiencing volatility, investors who are looking for stability and long term gains can invest in the consumer food industry. One of my all-time favorites is ConAgra Foods, Inc. (NYSE:CAG), one of the largest U.S.-based food companies with famous product lines like Healthy Choice, Slim Jim, Peter Pan, and Swiss Miss. The company has faced a lot of criticism over the last few years because of pathetic growth compared to its peers. However, with the company’s release of an impressive fourth quarter earnings report, I feel this is the right time to invest in this stock. Below, I have listed three reasons that make ConAgra a good buy.

Impressive earnings report

The company reported a net income of $192.2 million, or $0.45 per share, as compared to the loss of $86.2 million, or $0.21 per share, reported for the same quarter last year. Consumer sales increased by 7%, with the Ralcorp Holdings, Inc. (NYSE:RAH) deal contributing around $962 million to the sales. The company generated revenue of $4.59 billion, an increase of around 33.81%, as compared to the $3.43 million revenue in the same quarter last fiscal year. The operating profit came in at $554.5 million (including the Ralcorp operating results), as compared to the operating profit of $407.5 million, in the fourth quarter last year.

Benefits from the Ralcorp deal

ConAgra Foods, Inc.ConAgra Foods, Inc. (NYSE:CAG) struck a deal to buy the private label food producer, Ralcorp Holdings, Inc. (NYSE:RAH), in November 2012 for $5 million. Ralcorp products include pasta, cereals, snacks, sauces, and frozen bakery products. The companies value the transaction at about $6.8 billion, when debt is included. ConAgra plans to finance the acquisition mostly with available cash, existing credit facilities, and new borrowings. ConAgra CEO, Gary Rodkin, said that private-label products are growing at twice the rate of name brands and now accounts for 18% of the overall packaged food market. The private label food business is very fragmented and the diverse list of Ralcorp’s products provides ConAgra with tremendous business opportunities to grow. The company has raised its cost savings estimate to $300 million by 2017 from the previous estimate of $225 million. The Ralcorp acquisition has generated $1 billion in sales for ConAgra. Even though ConAgra had tried the acquisition many times before in the last fiscal year, the deal has been worth the wait.

ConAgra vs. peers

With a dividend yield of 2.8%, as compared to the industry average of 2.4%, ConAgra Foods, Inc. (NYSE:CAG) has been a shareholder-friendly company. The company has constantly increased its dividend payout since 2008. There have been other key players in the food industry like Nestle SA Reg Shs. Ser. B Spons (ADR) (OTCMKTS:NSRGY), Unilever N.V. (ADR) (NYSE:UN), and Kraft Foods Group Inc (NASDAQ:KRFT). The table below shows a comparison between ConAgra and its peers:


Nestle SA Reg Shs. Ser. B Spons (ADR) (OTCMKTS:NSRGY) is the largest food company in the world, both in terms of market cap and revenue. It has a diverse product line that includes baby food, chocolate, ice cream, coffee and tea, bottled water, etc. Some of its popular brands are Nescafe, Haagen-Dazs, Gerber, and Hot Pockets. Even though Nestle pays a slightly better dividend yield of 3.2% as compared to ConAgra Foods, Inc. (NYSE:CAG)’s 2.8%, it is currently trading at a higher P/E, PEG, and P/S multiple as compared to ConAgra, which makes ConAgra better valued than Nestle. The quarterly revenue growth of Nestle is also lower than ConAgra. Moreover, ConAgra has immense potential to diversify its business globally and increase its growth, whereas Nestle has almost no scope to grow as it has already capitalized upon its international diversification.

Kraft Foods Group Inc (NASDAQ:KRFT) has also been one of ConAgra Foods, Inc. (NYSE:CAG)’s major competitors. Kraft is the ex-parent of Mondelez International Inc (NASDAQ:MDLZ) and post its spin-off, it has been focusing on grocery markets in North America. Kraft has a higher debt-to-equity ratio of 2.66, as compared to ConAgra’s 2.07. With a trailing P/E ratio of 20.63, Kraft is the most expensive among the three companies. Also, the market values Kraft at 17.4 times its forward earnings, as compared to ConAgra’s 12.8. Although Kraft provides a better dividend yield of 3.7%, it is looks expensive to me.

Foolish bottom line

After the Ralcorp Holdings, Inc. (NYSE:RAH) acquisition, ConAgra Foods, Inc. (NYSE:CAG) has a net debt of around $9.2 billion and a negative tangible book value of $6.5 billion. In spite of being highly leveraged, ConAgra looks attractive to me. It is relatively cheap compared to its peers and has great potential synergies from the Ralcorp acquisition. With an impressive earnings report, ConAgra has strengthened its position in the food industry. I am bullish on this stock and the returns from this stock should definitely make your portfolio fat!

The article This Food Giant Can Make Your Portfolio Fat originally appeared on Fool.com and is written by usha patodia.

usha patodia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. usha is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

The 15 Most Murderous Countries in the World

10 Largest Colleges in the World: Bigger Isn’t Always Better

Comedians in Cars Getting Coffee: The 6 Comedians Seinfeld Needs to Interview

Easy Money: The 10 Most Successful Investors in the World Today

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!