3 Reasons ConAgra Foods' Stock Could Fall

ConAgra Foods (NYSE: CAG  ) is a profitable company with many  well-known brands that can be found in households across the United States. In addition, potential investors likely see its solid 3.2% dividend yield as an attractive investment.

However, not all is well at ConAgra. It's suffering a significant drop in sales, as its frozen and packaged foods aren't selling as well as they used to. Management cites shifting consumer preferences as the primary reason for this, which is a disturbing sign.

In addition, the company's large acquisition of Ralcorp Holdings, designed to enhance its presence in private-label brands, is proving far more costly and less accretive than management had initially anticipated. This has left ConAgra with a bloated balance sheet and a lot of debt on the books.

While it's by no means certain that ConAgra's stock will fall, here are three reasons that it could.

1. Frozen and packaged foods aren't selling well

ConAgra has three core brands that account for a large percentage of its sales. These are Healthy Choice, Chef Boyardee, and Orville Redenbacher's. These brands make up the foundation of the company's consumer foods segment, which is ConAgra's largest business and represents approximately 40% of total sales.

Last quarter, however, ConAgra posted sales of $1.8 billion, but that represents a 7% decline year over year. It's worth noting that this wasn't the result of foreign exchange effects or pricing. The primary culprit was a 7% drop in volumes, which means people simply aren't buying these products as much as they used to.

ConAgra's three core brands mentioned above account for more than half of the total sales in its consumer foods business, and those are the ones struggling the most. Management noted that these three brands faced severe volume and profit challenges last quarter.

In response, ConAgra plans to announce promotional changes. The company expects performance of its key brands to improve in the upcoming fiscal year, but of course there's no guarantee of this. That's especially true if the company turns to discounting as a means of reenergizing sales.

2. Acquisition strategy falling flat

In order to boost its private-label brands, ConAgra bought private-label company Ralcorp Holdings for $5 billion in late 2012 and closed the deal in early 2013. However, the acquisition 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.

Even here, there are risks involved. ConAgra stated in its most recent 10-K filing that it may not generate the cost savings or realize the growth opportunities it anticipates from the acquisition. The company may not eliminate duplicating costs, which fuel its synergy estimates. This already seems to be a problem, which is why ConAgra recently lowered its full-year earnings estimates.

ConAgra's private brands segment posted a $573 million loss last quarter, due to significant impairment charges. Management attributes this to higher-than-expected operating costs resulting from the business transition.

3. Bloated balance sheet

Because of such a large acquisition, ConAgra's balance sheet is now stuffed with debt. At the end of the last quarter, the company carried more than $8.5 billion in senior long-term debt and another $2.6 billion in what it calls "other [non-current] liabilities" compared to just $5.3 billion in shareholder equity.

Including all this debt, ConAgra's long-term debt is more than twice its level of equity. This is a burden that will utilize a lot of cash flow to pay off. ConAgra expects to pay off $1 billion in debt in the upcoming fiscal year, but obviously paying down all this debt will leave less cash available for equity investors.

The bottom line is that ConAgra's profits were already under pressure from falling sales of its key brands. In addition, it's losing money from its acquisition of Ralcorp, and profits will be further pressured by all the debt it's taken on.

Adding all this up, it's very possible ConAgra's earnings per share will disappoint going forward. Conceivably, this could have a negative impact on its share price.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3074846, ~/Articles/ArticleHandler.aspx, 12/18/2014 12:35:59 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement