ConAgra Underperforms - Analyst Blog

North America's leading packaged food company, ConAgra Foods, Inc. (CAG), has reported results for the first quarter of fiscal 2011, which are slightly below expectations on account of increases in costs and expenses as well as a high domestic inflation rate.

EPS (excluding a one-time expense) was 34 cents, down from 38 cents in the year-ago quarter, and net income was $151.6 million, down 10.5% from $169.3 million in the first quarter of fiscal 2010. Reported EPS was far below the Zacks Consensus Estimate of 39 cents.

Net revenues slipped 2.4% to $2,817.6 million from $2,886.3 million in the corresponding quarter of fiscal 2010, also below the Zacks Consensus Estimate of $2,975 million. The decrease in total revenues was due to a 3.2% decrease in revenues from the Commercial Foods segment and a 1.9% decrease in the Consumer Food segment.

Revenues from the Commercial Foods segment decreased due to lower sales in flour mills. The decrease in revenues from the Consumer Foods segment was based on the combined effect of lower volume and price.

As a percentage of revenues, cost of goods sold inched up by 140 bps while SG&A (selling, general and administrative) expenses remained at 14.6%. Corporate expenses were $84 million, down from $100 million during the same period of the previous year based on lower incentive compensation expenses during the quarter.

At the end of the quarter, operating cash flows reduced to $108.8 million from $262.6 million at the end of first quarter of fiscal 2010 based on working capital adjustment. During the quarter, ConAgra spent $129 million as capital expenditures for property, plant and equipment compared to $117 million in the year-ago period and paid a total dividend of $88 million in comparison to $85 million in the year-ago quarter.

ConAgra has been making various strategic moves in order to enhance its portfolio. During the quarter, the company acquired American Pie for approximately $130 million and divested Gilroy Foods & Flavors dehydrated vegetable operations to Olam International for $250 million.

Outlook

Based on the first quarter results, ConAgra narrowed its EPS growth expectation from the range of 8%-10% over the fiscal 2010 EPS of $1.74 to just 5%-7%. Moreover, a highly-competitive food industry and extremely volatile commodity prices are matters of concern at the present sluggish environment.

Hence, we reiterate our Neutral recommendation over the longer term. The stock currently retains its short term “Sell” rating, equivalent to a Zacks #4 Rank.
 
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