Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

ConAgra Foods, Inc. (CAG), Kraft Foods Group Inc (KRFT): Which of These Food Companies Is Going Strong?

ConAgra Foods, Inc. (NYSE:CAG)ConAgra Foods, Inc. (NYSE:CAG)’s share price has risen 34% in the last year, and nearly 6% on the day the company reported its fourth-quarter earnings recently. The company’s acquisition of Ralcorp seems to be a boon for both the top line and bottom line. Let’s delve deeper to analyze how good an investment it is.

What the numbers say

ConAgra Foods, Inc. (NYSE:CAG) reported revenue of $4.6 billion, 34% higher compared to the same period last year, mainly driven by the acquisition of Ralcorp. Even if we exclude the $1 billion in sales generated due to the acquisition, sales would have surged 6%, which I believe is decent considering what the sector has been undergoing lately. The net income for the quarter came at $192.2 million compared to a net loss of $86.2 million last year. Moreover, excluding one-time items, profit was $0.60 per share, a penny better than analysts’ estimates.

Gross margin was flat while the company’s operating margin declined 30 basis points. Last year, due to drought, there were significant price increases in agricultural inputs, which led to a considerable decline in sales volume, and as the company absorbed increased costs, margins were affected badly. Moving forward, margins should improve as input-cost inflation is expected to be milder in the coming year.

Further, the acquisition of Ralcorp should persistently create operating-cost savings and better margins. ConAgra Foods, Inc. (NYSE:CAG) raised its estimated cost-related synergies from the acquisition to $300 million from the previous estimate of $225 million.

Negative tangible assets

At the moment, ConAgra has a highly levered balance sheet after Ralcorp’s acquisition for $5 billion. In March, the company’s long-term debt stood at $8.7 billion. On the asset side, goodwill stood at $8.45 billion and trademarks and intangibles at $3.4 billion. As a result, ConAgra has a negative tangible book value, with high leverage, that reduces the company’s financial strength.

Striking the best mix

A test that ConAgra’s management faces is how to manage two discrete businesses, a large branded food business along with a large private-label business. The acquisition of Ralcorp means that about a quarter of ConAgra’s revenue will be generated from private labels, a business that is currently facing pricing pressure.

On the branded side, the company appears to be performing better because of improvement in its U.S. market share in many categories. The acquisition of Skippy by Hormel creates a distraction in categories like peanut butter and tomatoes and the acquisition of Heinz should improve chances for ConAgra Foods, Inc. (NYSE:CAG)’s growth in branded products.

What lies ahead?

In the current quarter, ConAgra’s earnings should remain flat due to considerable marketing expenses connected with the introduction of the latest summer products. The company’s commercial foods segment, Lamb Weston potato operations, has lost business from a major food-service customer that has not yet been disclosed. The lost sales will cost ConAgra $0.06 to $0.07 in 2014. For the full year, the company forecasts its earnings at $2.40 per share, below analysts’ average estimate of $2.48 per share.

Can’t overlook these competitors

Kraft Foods Group Inc (NASDAQ:KRFT) is ConAgra’s major competitor and an equally recognized household name in the North American market. Kraft, post its spin-off, is focused on groceries and the markets in North America. While ConAgra’s product mix and acquisition puts it in some uncertainty, Kraft Foods Group Inc (NASDAQ:KRFT) enjoys a stable business with almost assured annual revenue of roughly $19 billion.

Like ConAgra, Kraft Foods is also facing margin pressure. Analysts expect that the company will improve its margin by 300 basis points by enhancing its supply-chain management and reducing costs. Cost reduction should be achieved by reducing overhead and by extending the U.S. grocery division’s sales. Further, to reduce expenses, management centers in the U.S. will also be consolidated, which should result in lowering general and administration expenses.

Kraft Foods Group Inc (NASDAQ:KRFT) reported a healthy financial performance in the first quarter of 2013 with revenue of $4.55 billion, 2% higher than last year. The company’s stock price has surged almost 16% year to date and it has some recognized brands such as Capri Sun, Jello, Maxwell House, Planters, and Oscar Meyer that assure stable growth of 2% to 3% in the future. A 3.7% dividend yield is another incentive.

Mondelez International Inc (NASDAQ:MDLZ), after spinning off from Kraft Foods Group Inc (NASDAQ:KRFT), is poised to grow in global snacking. Similar to Kraft, Mondelez has diversified and recognized brands, such as Cadbury, Milka chocolate, Oreo biscuits, Trident gum, and Jacobs Coffee and is a leader in chocolates, gums, and biscuits.

Mondelez is a more diversified company geographically and also on the basis of the products it offers compared to Kraft Foods. The company expects to grow its revenue 5%-7%, which is easily achievable if it continues to maintain its current leading market share in chocolates and biscuits, and keeps its focus on emerging markets. Mondelez share prices fell after its spinoff from its parent company, but I see that as an investing opportunity, keeping in mind what the company has to offer to investors.

Currently, ConAgra Foods, Inc. (NYSE:CAG) is trading 19 times its earnings and Kraft Foods Group Inc (NASDAQ:KRFT) is trading at a P/E ratio of 21 times, a premium that it well deserves for a stable performance over time. ConAgra is comparatively cheaper than Kraft, but it has a high debt burden that weakens its financial stability. Moreover, ConAgra has a forward P/E ratio of 13 compared to Kraft’s forward P/E of 19, signifying more growth opportunity for ConAgra moving forward.

Final words

It would take at least a year for Ralcorp to start delivering the cost synergies that ConAgra Foods, Inc. (NYSE:CAG) expects from it. Further, the margins will be low in the current year and should start improving next year. I believe the company has strengthened its position among investors by delivering exquisite earnings, but a lot of uncertainty still surrounds it. I recommend a hold for ConAgra at the moment.

The article Which of These Food Companies Is Going Strong? originally appeared on and is written by tarun bachhawat.

tarun bachhawat has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. tarun 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.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.