We are upholding our Neutral view on ConAgra Foods Inc. (CAG) based on its reasonable pricing, smart marketing technique and cost-saving initiatives that have been delivering tremendous value to its consumers and shareholders for the last few quarters. But we are concerned about weakening demand within a competitive environment backed by fuel inflation, consumer budget constraint as well as competition from private labels.
Recently, food makers are in a bind with soaring raw material prices and upsized fuel costs. Such prevailing macroeconomic weakness and consequent cost-increase has also kept retail sales volume soft. As an industry participant, ConAgra is also compelled to raise its product prices, hurting consumer budgets and profitability.
In spite of such macro-economic threats, over time, ConAgra has been significantly expanding its business portfolio through acquisitions and other means, focusing on branded and value-added opportunities.
Capitalizing on strategic pricing and global growth opportunities, Lamb Weston and several other brands have proventheir continued potential. We believe the company will continue to add depth and dynamics to its existing product lines. Innovative snacking has also been a key to the company’s success for the last few quarters.
Management hopes to see rate of input cost inflation to moderate in the upcoming quarter. The recent signs of modest job recovery and receding gasoline prices look buoyant. Such optimism supported by plant efficiency may prove effective in improving margins going forward.
However, certain negatives neutralize our upside view. We must not forget the adversity of a challenging market place wherein the consumers prefer to spend more cautiously--given the ongoing food and fuel inflation, high unemployment and housing pressures. Competition from private label suppliers and big banners may shrink profits as well
With regard to a steady raw material supply, the undulating food industry exposes the company to market inconsistencies, currency fluctuations and changes in governmental agricultural programs. These continue to increase production cost, resulting lower profitability.
Currently, ConAgra retains a Zacks #4 Rank, implying a short-term (1-3 months) ‘Sell’ rating.
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