ConAgra Rated 'Delicious' as Profits Widen

NEW YORK (TheStreet) -- Shares of ConAgra (CAG) are up 21% so far this year, but the stock still looks cheap.

While the packaged-food industry has experienced challenging conditions, which has affected brands such as General Mills ( GIS), ConAgra seems to be navigating the environment pretty well.

What's more, with the completed $5 billion acquisition of Ralcorp, which should help widen ConAgra's margins, investors are betting on more share gains. It's hard to blame them. I'm not suggesting there won't be any challenges. But with continued improvements, ConAgra is looking like a great long-term play in the packaged-food industry.

Fundamentals Are Getting Better

While 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.

Besides, from an operational standpoint, management has met or beaten its targets where it matters the most. Despite a 4% decline in second-quarter volume, management still grew operating income by 9% -- helped by better cost management, as evidenced by the 13% reduction in corporate expenses. So while concerns about organic growth many linger, it's broadly overdone. And I think upcoming earnings will reflect this.

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.

Bottom Line

It's hard not to like the long-term direction of the company. However, if there is a risk here, it's the fact that the Street loves this company a bit too much. In other words, given that the stock is already at its 52-week high, ConAgra is already expected to do great things. That said, relative to Heinz ( HNZ), which still trades at a premium to ConAgra, there is still quite a bit of value here.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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