3 Reasons ConAgra Foods' Stock Could Fall

ConAgra Foods is counting on a significant business turnaround this year, but it may not work out as management hopes. Here are a few reasons to remain cautious on the stock.

Bob Ciura
Bob Ciura
Oct 3, 2014 at 10:30AM
Consumer Goods

ConAgra Foods (NYSE:CAG) is in the process of a significant turnaround. After sales and profits fell last year because of the poor performance of its core frozen and canned products division, ConAgra is on its way back to growth. That will take time, and a few of the company's initiatives, such as successfully integrating its private brands acquisition, aren't gaining traction yet.

All told, ConAgra is obviously facing some headwinds and it's important to always consider the bearish case on a stock before investing. To that end, here are a few reasons why ConAgra stock could fall.

Operating profit declined in two of three business segments
Last quarter, ConAgra reported a 17% decline in diluted earnings from continuing operations. Its consumer foods segment was the lone bright spot of its three core operating segments. Its other two businesses, commercial foods and private brands, both posted significant declines in operating profits. In commercial foods, the main culprits were a poor potato crop. Most of ConAgra Foods' commercial business is done through its Lamb Weston potato products brand. ConAgra stated that it is now processing a new potato crop, and expects better results going forward; but that remains to be seen.

In private brands, the company is still reeling from its nearly $5 billion acquisition of Ralcorp Holdings last year. Soon after the acquisition, ConAgra realized it would not generate the synergies and productivity gains it had initially anticipated. To keep sales from collapsing, the company resorted to extreme pricing concessions. ConAgra has not yet lapped these concessions, which makes its results look ugly. For example, operating profit in commercial foods sunk 36% last quarter.

Full-year results may not reach expectations
Despite its continuing struggles, management still expects mid-single-digit growth in comparable EPS in fiscal 2015. ConAgra shares have remained resilient since its turnaround began, which means investors are presumably anticipating its turnaround materializing. ConAgra still trades for 14 times forward earnings, which isn't exactly a screaming bargain when you consider that sales and earnings are still under pressure.

To meet its full-year projections, management is counting on its consumer foods segment to pick up the slack going forward. Fortunately the consumer foods group is ConAgra's biggest segment, and represents 44% of the company's total sales.

Unfortunately, stagnating volumes and sales of its three core brands, Healthy Choice, Orville Redenbacher's, and Chef Boyardee, are holding back any progress in this area. ConAgra is pursuing marketing of new product lines in these groups, but a successful turnaround is far from a guarantee. If ConAgra doesn't meet its forecast for fiscal 2015, its valuation multiple still has room to compress further.

Stalled dividend
Since ConAgra is struggling to right the ship, it can't afford to accomplish all of its separate financial initiatives. ConAgra is aggressively paying down debt that it incurred from its Ralcorp Holdings acquisition. The company is also working hard to promote new products, such as its Cafe Steamers line within Healthy Choice. And, because profits are still struggling to grow, there isn't enough cash to go around.

Unfortunately, ConAgra's dividend will remain static for the foreseeable future. ConAgra provides a nice 3% yield, which might be attractive to income investors. But dividend-growth investors may lose patience with ConAgra, because management stated that it won't be able to increase its dividend for several more quarters. There are plenty of other companies, particularly within the consumer staples industry, that offer 3% dividends plus regular dividend growth. That could cause investors to flee from ConAgra, which would conceivably put pressure on the stock.

A few final Foolish thoughts
ConAgra held up decently in the first quarter of fiscal 2015; but the battle is far from won. The company is still struggling across its consumer foods, commercial foods, and private brands operating segments. ConAgra is doing some good things, such as promoting new product categories and paying off debt; but there's more to do.

The stock hasn't suffered a great deal in 2014, partly because management expects the turnaround, and still forecasts growth for this fiscal year. If that doesn't happen, however, ConAgra's mediocre results, and its lack of dividend growth, may leave a bad taste in investors' mouths.