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Good performance by a food major is music to investors' ears in these difficult times. ConAgra Foods (NYSE: CAG ) managed to play a sweet tune with impressive fourth-quarter numbers. Cost pressures seem to be softening for the company. Throw in some smart growth moves and handsome dividends, and ConAgra looks well-placed for a good year ahead.
Relief in sight
Adjusting for one-time items that were related primarily to a change in the method of accounting for pensions, ConAgra's bottom line climbed 9% from the year-ago period. Sales in its largest division, consumer foods, rose 6% despite a drop in volumes, thanks to higher prices and acquisitions.
Interestingly, though, volumes were higher in the company's other division, commercial foods. Its Lamb Weston (potato products) business is doing particularly well, gaining traction in the world's fast-developing markets. The annual global footprint of the business has now reached a whopping $1 billion.
Gross margins in the company's consumer foods division were up in the quarter compared to last year, which is great news. Better still, easing input prices should help margins improve further in the coming quarters. General Mills (NYSE: GIS ) , which also faced tremendous pressure on margins because of inflation, feels that sales are gaining momentum now, and consumers can breathe easy. These food companies are likely to give their price increase spree a break, and not raise prices this time as much as they did last year. ConAgra seemed to be hinting at this when it mentioned how it will 'lap the price increases' implemented in financial year 2012.
Along with moderating inflation, ConAgra's growth initiatives should push up volumes further. When inflation didn't allow its top line to grow, ConAgra took to acquisitions to fuel growth. The strategy is apparently paying off well, as acquisitions made last year were a key driver of its fourth-quarter profits. But what I like most is that the company is not just expanding existing product lines, but also adding new ones to tickle the taste buds of consumers. Frozen breakfast foods and pita chips are two recent examples.
ConAgra will acquire the second-biggest frozen-breakfast-sandwich maker in the U.S., Odom's Tennessee Pride. The U.S. market for frozen food is huge, with forecasts of the market topping $70 billion by the middle of this decade. Little wonder then industry players are showing interest in this area. For instance, leading frozen-food company Kellogg (NYSE: K ) is launching interesting frozen products such as low-fat, high-protein waffles and beef-flavored veggie meatballs. Ralcorp (NYSE: RAH ) , the company ConAgra failed to take over last year, recently acquired Italy-based company Gelit, which specializes in ready-to-eat frozen meals.
As for pita chips, the name that first pops up may be PepsiCo subsidiary Stacy's pita chips. ConAgra is set to enter the market after having acquired Milwaukee-based Kangaroo Brands' chips business last month. It will be an addition to ConAgra's private labels, which is a welcome move. Private labels are gaining popularity because they are good "value for money," and the U.S. is likely to see record demand for private labels this year. ConAgra understands how consumers expect significant value for everything, and doesn't want to miss out on the opportunity.
The Foolish bottom line
ConAgra is balancing its act well when it comes to deployment of cash. Apart from acquisitions, it bought back $360 million worth of shares in the last financial year, and might go for more. A handsome dividend yield of 3.8% gives ConAgra's shareholders further reason to be happy.
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