
ConAgra's Plans to Trim the Fat Make the Food Company a Buy
NEW YORK (TheStreet) -- ConAgra Foods (CAG) - Get Report , known for popular brands like Orville Redenbacher's, Hunts, Chef Boyardee, and Slim Jim, will report first-quarter fiscal 2016 earnings results Tuesday before the opening bell. After activist investor Jana Partners took a 7.2% stake in ConAgra, sentiment on the company has turned positive, sending shares soaring as much as 36% from their March lows.
It's been more than Jana's involvement, however, that has sparked ConAgra stock. Not only has the century-old packaged food specialist announced plans to divest several struggling private brands, the brands it said it will retain have the potential to help save the company even more money in the quarters ahead. These maneuvers, when combined with its plan to slash long-term operating expenses, can boost operating profits significantly.
As evidenced by the 19% year-to-date gains in ConAgra stock -- and a 25% gain in six months -- it would seem the market anticipates this positive effect. Investors now wonder: After this incredible run-up in, how much more upside is left?
This is where patience becomes important.
As it divests itself of some of its non-core, private-label brands, the company can focus on not just on its commercial foods businesses, but also its consumer foods segment -- its core revenue and profit generator. Those two business, which grew 6.6% and 4.5%, respectively in the fourth quarter, bring in a combined $12 billion in annual revenue and about $1.5 billion in profits each year, or roughly 75% of the company's business.
By contrast, in the fourth quarter, the private brands business posted revenue declines of 1%. Further, the company is beginning to make cost-saving improvements in areas like supply chain management, which can boost long-term profit margins. All told, with management setting profitability as a top priority, now is the time to own ConAgra stock.
For the quarter that ended in August, the company is expected to earn 40 cents per share on revenue of $3.68 billion, compared to earnings of 39 cents per share a year ago on revenue of $3.7 billion. For the full year ending in May 2016, earnings are projected to be up 3% year over year to $2.24 per share, while revenue is expected to down about 1.6% at $15.58 billion.
Based on analysts' average full-year 2017 earnings estimates of $2.43 a share -- which put ConAgra's forward P/E at 17 -- there's plenty of value here. Not only is that forward P/E in-line with the S&P 500 (SPX) index, earnings of $2.43 per share would reflect a growth rate of more than 8%, or twice the 2016 percentage rate.
Combined with ConAgra's 25-cent quarterly dividend, which yields 2.40% annually, the smart play here is to hold these shares, wait for the company to execute its plan, and enjoy a healthy profit.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.








