ConAgra (CAG) Poised To Grow Despite Macroeconomic Woes

On Sep 6, 2016, we issued an updated research report on premium consumer goods firm ConAgra Foods, Inc. (NYSE:CAG) . The company is one of the leading food companies in North America and caters to grocery retailers, restaurants and other foodservice establishments. It also boasts a brand presence across 97% of American households. However, tough competition and market volatility remain concerns.

Growth Drivers

ConAgra intends to become a high performing company and make lucrative investments in its product portfolio. In sync with its strategy, the company is divesting its loss-incurring segments to garner higher cash proceeds for funding the development of innovative products. For instance, cash proceeds from the successful divestiture of Private Brand segment in Feb 2016 are being used to lower the company’s existing debt burden and fund product innovation programs. Moreover, ConAgra completed the divestiture of its JM Swank and Spicetec Flavors & Seasonings business in Jul 2016. This move refelcts the company’s intention to raise shareholders’ value and reinforce product portfolio in the near term.

This premium consumer goods firm has declared that it will split its more profitable Commercial Foods segment and less profitable Consumer Foods segment into two separate public companies – ConAgra Brands and Lamb Weston – by the end of 2016. The decision indicates the company’s focus on greater commercial flexibility and intention to improve business in the quarters ahead. Moreover, ConAgra aims to enhance its financial structure on the back of better segmentation of its portfolio, product innovations and efficient marketing strategies.

With the help of effective schemes related to product, pricing, place and promotion, ConAgra intends to grow demand for its popular branded products, thus bolstering its aggregate sales. Also, ConAgra intends to drive its revenues and margins by strategically expanding its business inorganically. Notably, the acquisition of All Natural Foods in May 2015 supported ConAgra’s top-line results in fiscal 2016 by tapping on the growing demand for frozen food.

Headwinds

ConAgra conducts its business in a highly competitive industry. Intense competition increases the bargaining power of consumers, thus exposing the company to risks of market share loss. Moreover, in order to increase or retain demand from prospective end users, ConAgra not only needs to ensure good product quality and prices but also has to maintain greater corporate transparency by ascertaining health and wellness aspects of products.

To this end, the company has made huge investments in new growth projects or research & development. However, such costs add to its existing debt burden. Also, greater business globalisation exposes the company to several economic, political and environmental headwinds. Notably, appreciation of the U.S. dollar has been affecting ConAgra’s international revenues and margins of late. Also, prices of various raw inputs used by ConAgra such as soybeans, pork, oats, beef, poultry, wheat, and corn are highly sensitive to commodity market fluctuations, demand & supply imbalances, unfavorable climatic conditions and changes in government agricultural or energy relations. Sudden rise in the market prices of such inputs would remarkably increase ConAgra’s raw material, packaging, energy and operational costs. Hence, such price inflations would directly hurt the company’s margins in the near term.

Stocks to Consider

ConAgra currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks within the industry include Omega Protein Corporation (NYSE:OME) , Tate & Lyle (LON:TATE) plc (OTC:TATYY) and US Foods Holding Corp. (NYSE:USFD) . All the three companies presently sport a Zacks Rank #1 (Strong Buy).

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