CAG Delivers a Strange Upside Surprise

For Dvorchak's preview heading into the ConAgra conference call, please click here.

ConAgra Foods' (CAG Quote - Cramer on CAG - Stock Picks) upside surprise of 3 cents really did surprise investors, because the company pre-announced a downside surprise not even two weeks ago! Management spent a fair amount of time on the call explaining why the company was able to report EPS of 27 cents on $3.07 billion in revenue, right in line with the expectations it changed in early September.

It turns out that Lehman Brothers (LEH Quote - Cramer on LEH - Stock Picks) wrecked yet another situation. In this case, ConAgra was not able to complete the normal reconciliations before the company was supposed to present at the Lehman Back To School conference in early September, so management decided to preannounce preliminary results before all reconciliations were done. Management noted that if the company were not scheduled for the conference, it would have finished closing the books, and no one would be the wiser. Any reversal like this always brings up questions of management credibility and systems robustness, but management was sufficiently clear and forthcoming that investors felt comfortable that this was a quirky one-time occurrence.

Meanwhile, ConAgra had to grapple with the more important issue of input ingredient inflation, which is crimping margins significantly. The company took aggressive pricing action in March, so this quarter was the first in which the full impact of that action was felt. Volumes were actually up a couple percent more than expected, as wholesalers built inventory in front of another price increase scheduled for late August. Management feels that pricing is now caught up with inflation for the next couple quarters. The company also believes that inflation will moderate going forward, with management expecting 11% to 12% input increases this quarter vs. the 15% that the company suffered last quarter.

Unfortunately, inflation isn't the only issue. Competition is getting fierce in the frozen dinner segment, which is impacting results and mix. Management noted that competitors are discounting aggressively and ConAgra will need to react to sustain market share. The company believes that the category will return to an innovation-driven dynamic soon, but, for the moment, management expects margins to suffer in this segment.

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