Fundamentals Are Getting BetterWhile I've always liked ConAgra's business, the deal for Ralcorp demonstrates management's willingness to get better. One of the challenges that have plagued this industry is inflation. In order for businesses like Kraft Foods ( KRFT) and Kellogg ( K) to thrive, the companies have to raise prices. Unfortunately, as a consequence of price increases, there's always a noticeable decline in sales volume. Customers hate them. But investors need them. To that end, ConAgra's deal for Ralcorp looks brilliant from the standpoint of operational efficiency. Admittedly, I didn't like the deal when it was announced. At $90 per share, which equated to a premium of 28%, I felt ConAgra overpaid. Clearly, given ConAgra's share-price movement since the announcement of the deal, the Street felt differently. Despite ConAgra's consistent fundamental improvements, the company should look much better once Ralcorp is fully integrated into the mix. To that end, investors should expect a leaner and more valuable company in the long term, provided that management is able to remove costs associated with Ralcorp, while improving asset utilization. But these are some big ifs.
Are There Causes for Concern?There are always causes for concern in every company, regardless of how strong the performance may be. In the case of ConAgra, though, it depends on where you look. For instance, the company is coming off an excellent second quarter, during which revenue rose 9%, including 11% growth in the consumer segment.
However, bears will argue that much of this growth came strictly from acquisitions, including a $265 million deal for Unilever's North American frozen-meals business in the first quarter. Nevertheless, this industry is beginning to consolidate. And I don't believe ConAgra should be disparaged for any growth it is able to produce -- regardless of means.
The company will announce fiscal third-quarter results April 3 before the market opens. The Street is looking for earnings of 57 cents per share on revenue of $3.88 billion. With four consecutive quarters of beating analysts' estimates, investors should expect another solid report. To what extent there's organic growth improvement remains to be seen. But it won't matter if the share price goes up.