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Is ConAgra Foods, Inc. Destined for Greatness?

http://www.fool.com/investing/general/2014/03/01/is-conagra-foods-inc-destined-for-greatness.aspx

Alex Planes
March 1, 2014

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does ConAgra Foods (NYSE: CAG) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell ConAgra's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at ConAgra's key statistics:

CAG Total Return Price Chart

CAG Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

44.9%

Pass

Improving profit margin

(27.1%)

Fail

Free cash flow growth > Net income growth

28.3% vs. 5.7%

Pass

Improving EPS

11.5%

Pass

Stock growth (+ 15%) < EPS growth

46.2% vs. 11.5%

Fail

Source: YCharts. |
*Period begins at end of Q3 2010.

CAG Return on Equity (TTM) Chart

CAG Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

2%

Pass

Declining debt to equity

163.5%

Fail

Dividend growth > 25%

8.7%

Fail

Free cash flow payout ratio < 50%

47.6%

Pass

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
ConAgra doesn't come through with flying colors, but five out of nine possible passing grades is a respectable performance nonetheless for such a large company. Fierce competition in the food industry and weaker commodity prices has given ConAgra a haircut on profit margins lately, but share prices have continued to grow nonetheless, surpassing gains in net income. Will ConAgra be able to overcome the discrepancy between its share price and its fundamentals? Let's dig a little deeper to find out

Packaged-food manufacturers, which are typically ConAgra's core customers, have lately struggled to maintain product volumes amid a growing demand for natural and organic foods. As a result, ConAgra reported lackluster revenue and earnings per share in its latest quarterly results. Fool contributor Dan Caplinger notes that the company's Ralcorp private-label business hasn't fared well either, due to a weak potato crop, but also because of changing market conditions in the grocery industry, resulting in lower-than-expected earnings guidance for the second half of ConAgra's 2014 fiscal year.

ConAgra plans to shore up its deteriorating business performance through a wider advertising and marketing strategy. Moreover, the company has also introduced 23 new restaurant-quality frozen meals with the Bertolli and P.F. Chang brands, which should help meet the demand for higher-quality frozen meals at supermarkets. On the other hand, ConAgra's packaged-food rival Kellogg boasts a strong pipeline of Genetically Modified Organism (GMO)-free products for 2014, which will ratchet up competition between natural/organic foods and the industrial-food ConAgra represents. Of course, Kellogg is quite industrial in its own right, but consumer perception matters, and ConAgra can't afford to fall behind the curve.

ConAgra continues to sign more lucrative private-label partnerships with grocery-store chains, which are turning toward private-label products to raise profit margins. However, food giant Nestle has begun making inroads into some of ConAgra's markets -- the Swiss-based company has rolled out a new line of frozen dinners and is heightening its focus on