Can ConAgra Earnings Keep Up With Kraft Foods and Nestle?

ConAgra (CAG 0.32%) will release its quarterly report on Thursday, and investors have increasingly doubted whether the food giant can hold its own in an increasingly competitive environment in the industry. With Nestle (NSRGY 0.24%) and Kraft Foods (KRFT.DL) both having held up much better since August than ConAgra has, skeptics are pointing at ConAgra's lack of earnings growth as a reason to doubt its capacity for future success.

ConAgra is a colossus in the North American food market, with popular retail brands including Peter Pan peanut butter, Healthy Choice TV dinners, and Orville Redenbacher's popcorn. Yet with its acquisition of Ralcorp Holdings last year, ConAgra boosted its already extensive presence in the private-label food production industry, and it also has a big presence in commercial-food preparation to provide ingredients and branded food products to food-service and other industrial customers. Still, the key for ConAgra is whether it can take those strengths and turn them into bigger profits. Let's take an early look at what's been happening with ConAgra over the past quarter and what we're likely to see in its report.

Stats on ConAgra

Source: Yahoo! Finance.

Will ConAgra earnings get better this quarter?
Analysts have gotten much less optimistic about ConAgra earnings in recent months, slicing almost a dime per share from their November-quarter estimates while making more modest cuts of $0.02 to $0.05 per share for their full-year fiscal 2014 and 2015 projections. The stock hasn't responded well, falling 6% since early September.

ConAgra's woes really began during the summer, with ConAgra giving an early warning about its August-quarter results. The company cut its earnings expectations for the full fiscal year by 1% to 2.5%, reducing its growth rate from the previous year's earnings to just 8% to 10%. ConAgra pointed to weak earnings in the August period, calling out its consumer foods segment as posing particular challenges for the company. Some analysts speculated that customers have shifted their preferences more toward natural foods, which would pose a threat not just to ConAgra but also to Kraft and Nestle as well.

Looking forward, the picture for ConAgra still looks uncertain. On one hand, ConAgra has responded to its recent weakness by offering more promotions and boosting its advertising and marketing in an effort to capture more customers. Yet even at a valuation that's far cheaper than Kraft Foods or food peer Kellogg (K 0.13%), ConAgra has had trouble producing the growth that investors have wanted to see, especially in light of price increases that have driven away part of its demand.

The big question for ConAgra is whether it can make maximum use of its buyout of Ralcorp to profit from private-label opportunities. Increasingly, grocery-store chains have turned to private-label products to try to raise their own paper-thin profit margins, and ConAgra has done a good job of creating lucrative private-label partnerships to create win-win scenarios for everyone involved. In many ways, private-label foods have been ConAgra's biggest weapon against Nestle, with its world-renowned brand, as well as Kraft's popular name-brand products as well. It has taken time for ConAgra to integrate Ralcorp fully into its operations, but long-term synergies from the acquisition should help ConAgra in its broader efforts to keep costs under control.

In the ConAgra earnings report, watch to see if the company comments on its recent loss in a ruling concerning lead-paint contamination. ConAgra has argued that it shouldn't have been subject to liability in the first place, although the court found it responsible for the liability of W.P. Fuller. Unless the $1.1 billion judgment is overturned, it could cause even more grief for an already-struggling ConAgra and its results going forward.

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