On Feb 25, we upgraded our rating on food giant, ConAgra Foods Inc. (CAG) to Outperform based on its improved prospects going forward, following its acquisition of Ralcorp Holdings Inc., the largest private label food products company based in the US.
Moreover, subsequent to the acquisition ConAgra became a Zacks #1 Rank (Strong Buy).
Why the Upgrade?
ConAgra completed the acquisition of Ralcorp Holdings on Jan 29, 2013. Subsequent to the acquisition, ConAgra will become the market leader in packaged foods industry for the region, with roughly $18.0 billion in sales annually. It is also expected that the strategic acquisition will bring about cost synergies to the company.
Following the acquisition, last week ConAgra raised its earnings expectations for fiscal 2013. The Ralcorp purchase is expected to contribute 5 cents and 25 cents to earnings per share in 2013 and 2014, respectively. Therefore, ConAgra increased its earnings outlook for fiscal 2013 to $2.15 from previous expectations of $2.06 per share.
The Zacks Consensus Estimate for fiscal 2013 has also gone up 2.9% to $2.15 per share following the guidance raise. Moreover, the Zacks Consensus Estimate for fiscal 2014 has increased 4.8% to $2.42 per share.
Apart from the Ralcorp acquisition, better than expected performance of its base business also drove the guidance increase. Despite a higher debt position, resulting from the acquisition, ConAgra maintains its current dividend policy and expects to raise it further in the coming quarters.
Other Stocks to Consider
Besides ConAgra, other stocks in the food industry that are currently performing well include Chiquita Brands International Inc. (CQB), Flowers Foods, Inc. (FLO) and J&J Snack Foods Corp. (JJSF). All these companies carry a Zacks #1 Rank (Strong Buy).
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