ConAgra Falls on Lowered Guidance


Stock price for the consumer foods company, ConAgra Foods, Inc. (CAG) declined 6.3% on Feb 11, 2014, as it cut its fiscal 2014 (ending May 2014) guidance. The company lowered its adjusted earnings per share expectations for fiscal 2014 to a range of $2.22 to $2.25 from $2.34 to $2.38 range.

The reduction in expected earnings per share comes due to a longer-than-expected time required to refurbish the Private Brands segment’s operating profits. The delay occurs because of customer service, pricing and sales force coverage issues in the segment.

Another reason for the downward revision was difficult margin situation in the Commercial Foods segment along with lower-than-expected volumes for the Consumer Foods segment. In the Commercial Foods segment, the Lamb Weston potato operations are facing continuous headwinds due to the loss of a major customer in the first quarter of fiscal 2014. However, the segment is expected to improve in fiscal 2015.

Additionally, ConAgra has postponed the agreement to form Ardent Mills to the second quarter of calendar 2014, which earlier was expected to close in the first quarter of 2014. Ardent Mills is a joint venture between ConAgra, CHS Inc. (CHSCO) and privately owned Cargill Inc., which will offer services to customers in the baking and food industry. As planned, ConAgra will get a 44% ownership in the new mill, and will contribute its flour milling division to the same. The proceeds from the mill will be used to repay debt.

As the mill now will be formed at a later point in time, the expected dilution of 3 cents per share in fiscal 2014 earnings will not be accounted for.    

Per the new guidance, adjusted earnings per share in fiscal third-quarter 2014 is expected to be 60 cents, while that for the fourth quarter is expected to be 65 cents. Ralcorp is expected to contribute 20 cents to fiscal 2014 earnings, down from 25 cents as expected earlier.

In the second half of fiscal 2014, volume decline for Consumer Foods segment is expected in the range of 3%–4%, versus 1%–2% expected earlier. In fiscal 2014, cash flow from operating activities is estimated at $1.4 billion. The company expects to repay $1.5 billion debt by fiscal 2015. Considering the challenges in fiscal 2014, management does not expect to report double-digit growth in earnings per share for fiscal 2015, as expected earlier.

However, these challenges are expected to be short term in nature and therefore, ConAgra expects to generate double-digit growth in earnings per share in fiscal 2016 and 2017. Subsequent to fiscal 2017, management expects to witness annual sales growth of 3%–4% and earnings per share growth of 7%–9%.

With a market capitalization of $12.2 billion, ConAgra currently carries a Zacks Rank #2 (Buy). Other stocks worth a watch in the industry include Diamond Foods, Inc. (DMND) and The Hain Celestial Group, Inc. (HAIN). Both the stocks hold the same Zacks Rank as ConAgra.

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