ConAgra Foods, Inc. (CAG) is poised to benefit from its $4.75 billion Ralcorp acquisition as well as continued agricultural price deflation, which will allow the company to price more opportunistically, and the stock is currently a value as it trades at 15 times forecast earnings while carrying a 3% dividend yield, says Marshall Kaplan, Managing Director at Global Investment Solutions.
“[ConAgra] was historically a branded foods company until it acquired Ralcorp, a private-label company, in January of 2013, for about $4.75 billion. There are a couple of exciting components to the story. First, we think there is a margin expansion opportunity here because of agricultural price deflation — 2011 and 2012 were difficult years for food manufacturers as we saw double-digit inflation rates on cost of goods sold. This drove larger price increases on the products, which, in our opinion, had a negative impact on volume growth and margins. Price inflation is now moderating significantly. We would expect the second half of 2013 to post low-single-digit input cost increases and could actually see further price declines in 2014. We believe the cost savings will allow the company to be able to price more opportunistically,” Kaplan said.
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Kaplan also sees product innovation in CAG‘s future, and believes that if the company steps up its marketing and advertising efforts, it could drive volume growth and increase margins. Because the stock is currently trading at 15 times 2014 forecast earnings and exhibiting a 3% dividend yield, Kaplan considers CAG a value.
“From a valuation perspective, the stock trades on forecast earnings for 2014 — it’s a May fiscal year — at about 15 times. We think the synergies resulting from the acquisition of Ralcorp could provide upside to that. Further, we see product innovation on the way, and CAG has some very strong brands, like Marie Callender’s, Reddi-wip, Hunt’s and PAM. We are convinced that the stock, which also carries a 3% dividend yield, is not fully appreciated by investors at current levels,” Kaplan said.
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