Packaged-food producer ConAgra Foods (NYSE: CAG ) recently posted a staggering 181% jump in fourth-quarter profits, helped by insurance-related gains and lower selling, general, and administrative expenses. However, the company's shares ended the day relatively unchanged since a portion of these earnings was quite clearly nonoperational and since the company offered a tepid outlook for the first quarter.
The Nebraska-based company said it sees a "challenging" year ahead for food producers trying to balance higher input costs with struggling, price-sensitive consumers. On one side, the company has already faced a 9% rise in costs in its foods segment.
A look at the numbers
Revenues for the quarter increased 12.7% to $3.2 billion, helped largely by a favorable performance from the company's commercial foods segment, thanks to price increases the company was able to push through. The segment contributed almost 37% to overall fourth-quarter sales.
However, higher commodity costs led to a 17% jump in costs and sent gross margins down to 22%, from 25% in the year-ago period.
Despite the adverse effects of high input prices, the company still managed to up its net income by 181%, to $254.9 million, just not really on an operational basis. The company managed to drop selling, general, and administrative expenses by 48.7%. A notable insurance settlement helped the company drive its bottom line.
In general, rising costs are crushing everyone's margins in the business. Treehouse Foods (NYSE: THS ) lowered its annual outlook recently, citing higher commodity costs, and its shares dropped more than 7% as a result. Though the company raised prices, it said the effects of the price rise wouldn't be felt before the second half of the year.
Fortunately, cash is still abundant at ConAgra, where LTM cash flow from operations stood at $1.35 billion, down from $1.47 billion. The company's annual free cash flow stood at $727 million. This, coupled with an interest coverage ratio of 9.9, implies the company is in a comfortable position to square off its short-term debt obligations.
Rising costs, expansions, and deals
Nevertheless, ConAgra is in a tight spot. It needs to raise prices again and expand its operations overseas if it hopes to continue growing. The company has not given up on efforts to acquire Ralcorp (NYSE: RAH ) . Although two of its earlier attempts to acquire Ralcorp have failed, ConAgra is still hopeful of seeing the deal through.
In any case, ConAgra expects earnings growth of 6% to 8% this fiscal year, even if it fails in its bid to acquire RalCorp.
Foolish bottom line
ConAgra, like other food producers, will be affected by food inflation that may range between 7% and 8% this year. The company expects its diluted EPS to grow at a single-digit rate in 2012 on top of the $1.75 per share it earned in fiscal 2011. I wouldn't consider buying ConAgra given the challenges that it faces, but investors should keep a close eye on it.