It's been a pretty dismal summer for investors in ConAgra Foods (NYSE: CAG), with the stock currently down 18% from its high at the start of August. Essentially, the market got a little bit too excited by the company's purchase of private-label food manufacturer Ralcorp.

Furthermore, the stock price reflected a significant amount of optimism over the company's prospects within a difficult economy for food retailers. Unfortunately, ConAgra managed to miss estimates for the first quarter in FY ending 05/2014, and the market punished the stock accordingly. Is now the time to take advantage of this?

ConAgra disappoints
First, in order to put the following discussion into context, here's a look at each segment's operating income for the quarter.

source: company accounts

In a previous article, I discussed the three big risks with the stock, and it's time to assess them again. In its recently reported first quarter, ConAgra disappointed with the first risk factor by failing to generate organic volume growth in its consumer-foods division.

The second risk was also somewhat disappointing. The Ralcorp integration is proceeding as planned, but Ralcorp sales have been below management's expectations for the second quarter in a row. Last time around, ConAgra argued that the problem was short term and fixable, but this time around it blamed the soft retail market.

The third issue is that ConAgra still hasn't replaced the revenues given up when it lost a key customer for its Lamb Weston (potato operations) brand earlier in the year.. Aside from declaring that it was "very confident" in making up these sales going forward, there wasn't any significant announcement on the issue. Accordingly, the commercial-food segment saw sales flat, and operating income decline 7%.  

Tough markets, tough decisions
Focusing on the issue of organic growth in consumer foods, you shouldn't be surprised to see ConAgra's weak results. The consumer market remains challenged, and particularly so in the food category. Consequently, the leading players have been forced into an ongoing cycle of raising prices only to lose market share, then discounting/marketing/promoting in order to take back share, and then the tough cycling begins all over again.

The fact is hard-pressed consumers have become highly sensitive to price. Even a company that has been doing relatively well, like General Mills (NYSE: GIS), is having to invest in order to generate growth. In it's latest quarterly results General Mills outlined how its' advertising spending grew at a higher rate of 7% compared to its operating profit growth of 6%, and its organic sales growth of 3%. Sales growth doesn't come easy in this environment.

Unfortunately, it isn't getting any better. In fact, in August -- and one month into the previous quarter -- ConAgra reported that conditions were favorable, but conditions must have significantly deteriorated through the quarter. The company finished the quarter with a 3% organic-volume decline in consumer foods. Having declared that it felt a turning point had been reached thanks to the 3% organic-sales increase in the previous quarter, this result must have been disappointing.

However, as noted at the time, ConAgra had increased advertising and marketing spend by 15% in the previous quarter in order to get this growth. See what I mean by a tough cycle?

Indeed, it isn't just ConAgra. Kellogg (NYSE: K) gave results at the start of August, and promptly stated that "sales growth was lower than expected." A dosage of -- you guessed it -- increased advertising spending was immediately proscribed. Moreover, the only real growth is coming via acquisitions. Kellogg acquired Pringles, General Mills invested in Yoplait, and ConAgra bought Ralcorp.

Ultimately, it proved to be a quarter categorized by intensive pricing competition. Going forward, ConAgra's plan is to increase merchandising efforts, with the aim of taking back market share

What's Next for ConAgra?
Despite the gloom, there are reasons to be optimistic!

First, if the consumer market really is categorized by heightened consumer-price sensitivity, then ConAgra's merchandising efforts should lead to a pick up in volumes again. Second, the Ralcorp acquisition is going largely as planned, and management confirmed that it still expects $300 million in cost savings by 2017. Third, any announcement of a contract win for Lamb Weston's frozen-potato operations will provide some upside to the stock.

However, while ConAgra's operational performance can get better, its valuation still looks stretched.  The mid-point of its 2014 earnings-per-share guidance ($2.36) puts it on a forward P/E ratio of around 13 times. This looks good, but its implied free-cash-flow guidance is for around $1 billion this year. In other words, it's around 4.4% of its current enterprise value. 

Recall that ConAgra has around $8.6 billion in senior long-term debt, and few people are expecting rates to fall. Moreover, with debt repayment a priority, it's hard to imagine the dividend can increase for a while yet. All told, the recent pullback still hasn't made ConAgra's shares attractive enough on a risk/reward basis.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.