Should Investors Fear ConAgra's Debt Load?

ConAgra Foods has taken on a lot of debt to finance its strategic initiatives, which may backfire.

Jul 17, 2014 at 9:40AM

Investors are rightfully wary of companies that take on too much debt. After all, even well-run businesses can be brought to their knees under the weight of heavy debt loads. Companies that take on a lot of debt put themselves in danger, and that's especially true now considering the environment we're in.

Interest rates are still near historic lows, but it's unlikely rates will stay this low. After all, interest rates can't remain at rock-bottom levels forever. When interest rates do rise, it could make life much more difficult for companies with bloated balance sheets. For ConAgra Foods (NYSE:CAG), debt is a real concern. It's taken on a lot of debt over the past few years, which will place a great strain on its cash flow going forward if it needs to refinance its debt. Considering that ConAgra is in the midst of a major restructuring effort, that's not an unrealistic scenario.

Here's why ConAgra investors have reason to be concerned about the company's financial position.

Did ConAgra bite off more than it can chew?
ConAgra's debt load has expanded considerably in just a few years. At the end of its most recent fiscal year, the company held more than $8.6 billion in senior long-term debt. That's up from $2.6 billion at the end of fiscal 2012. Keep in mind that the $8.6 billion figure doesn't include additional debt that the company classifies differently. In addition to that, ConAgra has $2.6 billion in what it terms "other non-current liabilities." This compares to just $5.3 billion in stockholder's equity.

Specifically, ConAgra issued $1.5 billion under its term loan facility that matures in 2018. The interest rate used is calculated by LIBOR, an international equivalent to the Fed funds rate, plus 1.75%. In addition, ConAgra issued $750 million in unsecured notes that mature at the end of 2016. It was fortunate to issue the 2016 notes at an attractive yield of 1.3%.

Given the structural problems facing ConAgra, it's not unreasonable for the company to need to continue drawing from its loan facilities to finance its major ongoing restructuring. When these notes mature, however, it will have a difficult time doing so at attractive pricing, assuming rates keep steadily increasing. That seems likely given the Fed's consistent tapering.

ConAgra's balance sheet is in worse condition than other players in the food industry. For example, Sysco (NYSE:SYY) holds $2.9 billion in debt but $5.2 billion in shareholder equity. This provides it a much more comfortable long-term debt-to-equity ratio of 55% compared to ConAgra's ratio, which is 160%.

One of the reasons for ConAgra's debt increase is its ambitious acquisition campaign. ConAgra acquired Ralcorp Holdings last year for $5 billion, which it hoped would boost sales in its private-label brands. Unfortunately, the acquisition isn't working out as ConAgra had hoped. Due to higher-than-expected costs, ConAgra's private-brands segment posted a $573 million loss last quarter due to impairment charges.

Watch out for rising interest rates
ConAgra went on an ambitious spending spree to expand its business into new categories, such as private-label brands. This has resulted in a bloated balance sheet with a lot of debt on the books. While this isn't problematic yet, it might be once interest rates begin to rise. That will make it difficult for ConAgra to refinance its debt at attractive levels.

ConAgra has incurred significant debt over the past year. If ConAgra needs to refinance this debt, it may incur significantly higher interest rates if interest rates rise and ConAgra's financial position suffers further.

ConAgra's troubles are enhanced by the fact that its major acquisition isn't working out as it had planned. Sales in private-label brands soared, but significantly higher costs are resulting in losses, and unplanned writedowns are cause for concern. That's making the acquisition seem far less beneficial than the company likely hoped. As a result, investors need to keep an eye on ConAgra's balance sheet.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

 

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Sysco. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers