We are maintaining our Neutral recommendation on ConAgra Foods (CAG). The company’s continued business portfolio expansion and cost moderation efforts leveraging on the value-added opportunities through the acquisition of private labels.
The food maker has been significantly expanding its business portfolio over time, focusing on strategic acquisitions as well as existing capabilities. The company’s promotional campaigns, strong sales force, dedicated customer-serving teams, and category leadership continue to add depth and dynamism to its existing product lines.
Strong productivity and robust cost saving in both the Commercial and Consumer food segments have been boosting the company’s revenue growth for quite some time. In addition, ConAgra expects the rate of input cost inflation to moderate in the upcoming quarter. The recent signs of modest job recovery in the US and the anticipation of receding gasoline prices raise hope.
However, concern remains as we anticipate food and fuel inflation to take a huge toll in the coming quarters.Various raw materials used in the food industry are exposed to market fluctuations, supply-demand inconsistency and changes in governmental agricultural programs. Thesewill continue to raise cost and have a negative impact on the company’s operations.
Moreover, the food industry in recent times is backed by value oriented price sensitive consumers, who prefer to spend more cautiously due to unemployment and housing pressures. Prevailing macroeconomic conditions are thus making it difficult for the company to raise prices even on the back of rising costs.
The food industry is intensely competitive, facing challenges from private label suppliers as well as big banners like HJ Heinz Co. (HNZ) and Kraft Foods Inc. (KFT). Therefore, fierce competition may shrink the company’s market shares and eat into ConAgra’s profits.
ConAgra retains a Zacks #3 Rank, implying a short-term (1-3 months) ‘Hold’ rating.
CONAGRA FOODS (CAG): Free Stock Analysis Report
HEINZ (HJ) CO (HNZ): Free Stock Analysis Report
KRAFT FOODS INC (KFT): Free Stock Analysis Report
