Consumer Analysts Group of New York (CAGNY) is a good platform for companies to meet analysts and convey their performance every year. For 42 years, this group has brought companies closer to their investors. In February, CAGNY organized this year’s annual gathering where many FMCG giants ran their presentations.
Taking into consideration the disclosures made during this meet, I decided to analyze three stocks from this industry — ConAgra Foods, Inc. (NYSE:CAG), Campbell Soup Company (NYSE:CPB), and Kraft Foods Group Inc (NASDAQ:KRFT) in this article. Let’s discuss each of them in detail.
At CAGNY’s, ConAgra announced that it has completed the acquisition of Ralcorp Holdings. This acquisition will generate $0.05 EPS in fiscal 2013. It is also expected that Ralcorp should contribute about $400 million to ConAgra’s bottom line in fiscal 2014. Apart from this, the cost synergy from the acquisition in fiscal 2014 may be about $27.5 million, which should reach $225 million in the next four years.
The savings should come from an optimized supply chain, as well as leveraging corporate overheads. Through this acquisition, ConAgra will be able to transform its product portfolio into a more balanced one, with more contribution from private-labeled food (one-quarter of its total revenue).
Apart from this, ConAgra Foods, Inc. (NYSE:CAG) recently announced an agreement to combine its milling assets into a new joint venture with Cargill and Chico’s FAS, Inc. (NYSE:CHS) called Ardent Mills. ConAgra will hold 44% share in the venture. The venture’s expected annual sales will be about $4.3 billion, which is more than twice the sales of the company’s existing milling business.
Although, as a result of the transaction, around $1.8 billion in sales will move from ConAgra to the joint venture, which may result in a dilution of $0.05 in the EPS for fiscal 2014. But, the JV plans to distribute approximately $900 million to its owners after the transaction is closed in late 2013.
I see this transaction as a positive step for the company, as ConAgra gets liquidity in the short-run and gets to dispose-off a business that was volatile in terms of sales and earnings. Moreover, this move could reduce some of the volatility even in the company’s cash flow, because of the elimination of the working capital demands of the milling operations.
In its presentation, Campbell made it clear that from now on, the company’s focus will be more towards expansion into higher-growth areas with new customers and geographies, as well as innovation in its product line.
With the same aim, it recently entered into an agreement with Grupo Jumex and Conservas La Costeña to increase its global presence. Grupo will be responsible for producing the company’s V8 product line in the Mexican market, and Conservas will make and distribute the company’s soup, broths, and sauces in the region.
In addition, Campbell has announced that it will introduce 216 new products in fiscal 2014. Most of these new products will be an addition to its pasta sauces, beverages, and Bolthouse Farms product lines.
The global expansion and new products in its portfolio may look tempting, but after a closer look, I found some issues. Firstly, the reduced advertising may improve short-term profitability, it could bring down the brand image, which will be difficult for the company to revive.
Secondly, it seems convincing that the agreements with Grupo and Conservas are a good example of how the company can use external help to gain good scale in international markets. But, I feel that the results will only be visible in the long-term as Campbell Soup Company (NYSE:CPB)’s current exposure in the country is limited. The brand will require some time to reach the required heights.
The global initiatives and new product launches by the company are steps in the right direction, but the results of low advertising expenditure and the delayed positives of the expansion lead me to remain Neutral on the stock for now.