ConAgra Foods (NYSE:CAG) enjoys the benefit of a reliable business model. Since food is a basic requirement, ConAgra's products are in demand even when the economy goes south. ConAgra's portfolio of brands, including Hunt's, Chef Boyardee, Orville Redenbacher's, and Healthy Choice, provided buoyant sales even during the last recession.
Stability is fairly common throughout the packaged-foods space. This is true not only for ConAgra but Kraft Foods (NASDAQ:KRFT) as well. At least a few of Kraft's products, such as Oscar Mayer, Maxwell House, Miracle Whip, and Planters, along with ConAgra's, can be found in nearly every household in America.
But despite the slow-and-steady nature of food companies like ConAgra and Kraft Foods, there's still no such thing as a risk-free stock. There is always the threat of competition even within the food industry. And, in ConAgra's case, it made a significant acquisition last year for this very reason.
If you're interested in buying ConAgra today, here are a couple of risks you should know about.
ConAgra: Stable but not risk-free
ConAgra breaks out several risk factors in its annual filings with the Securities and Exchange Commission. Investors should be aware of these factors before jumping into the stock. One of them is the challenge the company faces from a shift in consumer preferences.
Even though ConAgra is a very large company with several different brands, management warns investors about the risk of consumers scaling back their spending toward cheaper, generic brands. While it's true that ConAgra has brands that are lower on the pricing ladder, those products are lower-margin as well and negatively impact profitability.
ConAgra holds a stable of brands that have generated strong profits for many years through the ups and downs of the broader economy. To that end, its sales grew 5% compounded annually since 2009.
The same is true of Kraft Foods, thanks to its own stable of well-known brands. Its sales are up about 1.5% compounded annually since 2009. That's not overly impressive, but Kraft maintains highly effective cost controls that have resulted in earnings per share from continuing operations growing at nearly 9% annually over the same time period.
As a result, it's clear that ConAgra looks to be highly recession-proof. But that dynamic may not always exist. ConAgra could lose market share to generic competitors should consumer tastes shift. In fact, ConAgra is showing some weakness in its flagship consumer-foods category, which is expected to post a 3%-4% decline in volume over the back half of the year due to weakness in a few unspecified key brands.
To combat this, ConAgra bought Ralcorp last year for $5 billion. This has greatly enhanced ConAgra's presence in private-label brands. ConAgra is now more diversified across price points and is better prepared for future fluctuations in consumer preferences.
However, the acquisition itself was not without its own risks. Management acknowledged that it was a very large takeover that would take time to be fully integrated. ConAgra is hoping to realize significant synergies from the deal. In fact, the company estimates it will generate $300 million in synergies by year-end 2017. This, along with other cost controls, is the foundation for management forecasting 7%-9% long-term annual earnings growth.
Even here, there are risks involved. ConAgra stated in its 10-K filing that it may not generate the cost savings or realize the growth opportunities it anticipates. The company may not eliminate duplicating costs, which fuel its synergy estimates. This is already showing up somewhat, which is why ConAgra recently lowered its full-year earnings estimates.
Some final Foolish thoughts
The bottom line is that while ConAgra performed admirably throughout the recession and is a large company with a portfolio of brands, it's not without its fair share of risks. ConAgra's business is exposed to changes in consumer preferences. This risk is mitigated somewhat by the acquisition of Ralcorp, which will boost the company's private-label business. But the acquisition itself was a risky endeavor. Management admits a buyout this large may not go as smoothly as planned.
At the end of the day, ConAgra has a certain amount of risks like any other company. For Foolish investors interested in buying the stock, it's worthwhile to know the risks before jumping in.
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Bob Ciura 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.