ConAgra Is Getting Battered Like Everyone Else

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High commodity costs have weighed on food producers' bottom line and hurt their margins this year. To minimize the impact of higher food prices, food producers have shifted the burden of higher costs to consumers by raising product prices.

ConAgra Foods (NYS: CAG) has been no different. Recently, it posted a staggering 181% jump in its fourth-quarter profits on the back of insurance-related gains and lower selling, general, and administrative expenses. But operationally speaking, things look very interesting for this Nebraska-based food producer.

Income matters
ConAgra's five-year compounded revenue growth rate stands at 3.7%, but in the last 12 months revenues have only increased by 1.9%. Sales have been sluggish as a tepid economic recovery and rising input costs have together taken their toll on the company's operations.

Gross margins dropped to 23.7% from 25.5% a year ago on rising commodity prices. On the other hand, operating profits increased to 11.4% from 10.9% a year ago as the SG&A expenses fell.

Overall, I think the company is combating adverse economic conditions pretty well. However, a company can only get so lean before it starts to cut itself to the bone. If things don't get better on a top-line standpoint, investors are not going to be pleased with the returns they see.

Short-term goals
ConAgra plans to raise prices even further to help combat high costs, which should work considering the nature of these products and the fact that rivals will have to do the same thing eventually (if they haven't done so already). These measures, when they are implemented, will send revenues higher.

The company is also looking at boosting its global presence and launching new products. It is also looking set to acquire Ralcorp (NYS: RAH) and if it succeeds, the acquisition would boost ConAgra's market presence and lead to higher revenues.

Stability
The company's debt-equity ratio stands at 68.7%, down from 70.4% a year ago. Its total debt has gone down to $3.23 billion from $3.48 billion a year ago, as it has repaid its debt.

The company has abundant cash. Its free cash flow stands at $837.9 million, down from $985.1 million a year ago. ConAgra's current ratio stands at 1.8 times, so it is comfortably placed to pay off its short-term obligations. Its interest coverage ratio stands at 9.9 times, which means repayment and assumption of more debt for funding future operations may not be difficult. The company has a strong balance sheet and is a solid cash-generating company.

Value
Let us now take a look at how the company is valued when compared to its industry peers.

Company

Trailing P/E

Forward P/E

TEV/FCF

ConAgra13.5714.5816.21
General Mills (NYS: GIS) 13.9015.1539.45
Bunge (NYS: BG) 4.4618.86NM
Archer Daniels Midland (NYS: ADM) 9.5510.83NM
Zhongpin (NAS: HOGS) 5.926.38NM
B&G Foods (NYS: BGS) 18.1522.91NA

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful, NA = not applicable.

On a cash basis, the company looks cheaper than its peers. Archer Daniels Midland, Zhongpin, and Bunge have negative free cash flows as the companies are under heavier debt load and have been paying off their debts.

Going by the strength of its balance sheet and operations, ConAgra may be a stock one could consider for the long run, especially when we take into account its future expansion plans. These plans, if successful, should boost the company's earnings and return value to shareholders.

ConAgra currently pays a dividend of $0.92 and has a dividend yield of 3.50%. Plus, it has a high payout ratio of 45.8%.

The Foolish bottom line
Investing in food producers at present is possibly a trick proposition as rising food prices pose a threat. But ConAgra has done well so far to combat these pressures and looks set to carry this performance forward. So investors may want to keep a close eye on this stock.

At the time this article was published Shubh Datta doesn't own any shares in the companies mentioned above.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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