ConAgra Falls Prey to Inflation

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Food companies have had it tough dealing with higher input costs. Many have been forced to pass the burden of higher costs to their consumers by raising product prices. Food maker ConAgra (NYS: CAG) saw its second-quarter profits fall 15% under such pressures.

Higher costs and lower sales have affected ConAgra and its peers' bottom lines and margins. ConAgra and peer General Mills (NYS: GIS) have pinned hopes of better performance on the second half of their fiscal years after subdued quarterly results. General Mills reported earnings at the same time ConAgra did, and saw earnings fall 28%.

Higher prices, lower profits
Revenues for ConAgra rose 8%, helped in part by raising prices and by higher sales at its biggest business -- branded consumer foods. Sales of branded consumer foods rose 4%. The business makes up 63% of its total sales. Its highest-selling products included Banquet, Chef Boyardee, and Hunt's. Higher input costs led to a 10% hike in the costs of goods sold. The company's gross margin fell to 22% from 24%, thus net income dropped 15% for the quarter.

What lies ahead
The company has pursued inorganic means of growth in recent quarters. After a failed takeover bid for Ralcorp (NYS: RAH) , the maker of Post cereal, ConAgra has focused more on acquiring smaller companies. Meanwhile, Ralcorp maintains an overweight rating.

ConAgra recently announced that it would pay $10 million to own a majority stake in Indian food company Agro Tech Foods; this will help ConAgra expand its international presence. It also recently finished a takeover of Brookstone Holdings' pretzel maker National Pretzel. Tom Graves, analyst at S&P Capital IQ, believes there are more acquisitions up ahead as the company seems to be following the takeover route to expansion. This somewhat explains why, despite inflation and high input costs, ConAgra has maintained its outlook for 2012.

ConAgra beat analysts' estimates in spite of disappointing quarterly numbers and sees its fiscal-year earnings per share growing in the low to mid-single digits, with a major chunk of the growth expected in the final quarter.

However, inflationary pressures could continue to take their toll on the company's margins. This year will be both interesting and challenging for the food maker and we at The Motley Fool will keep you in sync with all the happenings at ConAgra. To stay up to date all you have to do is click here and add the stock to your personalized watchlist. My Watchlist is a totally free service offered by The Motley Fool to keep you engaged with all your favorite companies.

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.

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