Former ConAgra Unit Fined - Analyst Blog

ConAgra Trade Group, a former unit of ConAgra Foods Inc. (CAG), has been fined $12 million by the U.S. Commodity Futures Trading Commission (CFTC) for artificially bidding up the price of crude.

On January 2, 2008, ConAgra’s trader bought an oil contract at $100 per barrel on the New York Mercantile Exchange when actually oil was trading at $99.60 per barrel. Moreover, the broker was directed to continue bidding at $99.90 a barrel, close to $100 per barrel, so that the original contract does not get cancelled by the exchange officials.

Later in 2008, ConAgra sold this unit to Ospraie Fund and other investors. The unit was later renamed Gavilon LLC. Although, Gavilon will be liable for the fine, but ConAgra has decided to pay $4.3 million to the former in order to settle the liability.

This is going to reflect in the results of the immediate quarter, the first quarter of fiscal 2011. Earlier, we expected 40 cents of earnings per share (EPS) for the first quarter and ConAgra expected an 8% -10% annual growth in its EPS for fiscal year 2011. However, during the fourth quarter and fiscal year 2010, ConAgra posted weak results based on sluggish economic conditions, which negatively affected the Consumer Food segment.

Nevertheless, ConAgra’s cost-reduction initiatives, which have helped in total cash savings of $300 million in fiscal 2010, will generate higher profits going forward and management expects $275 million of savings in fiscal 2011.

ConAgra has been making various strategic investments. In 2010, ConAgra built a state-of-the-art sweet potato processing plant in Delhi, Louisiana. This plant will significantly expand the company’s presence in the sweet potato fries market and is expected to add significant sales and profit growth opportunities for the Lamb Weston specialty potato operations over time.

The company also completed the acquisition of Elan Nutrition, a nutrition and snack bar manufacturer, for approximately $105 million and the assets of American Pie. ConAgra plans to divest its Gilroy Foods & Flavors dehydrated vegetable business to Olam International for $250 million. The transaction is expected to close by the first quarter of fiscal 2011. Thus, over the longer term we reiterate our Neutral recommendation and currently retain the Zacks #3 Rank, which translates into a short-term Hold rating.