On an otherwise down day for the market, shares of ConAgra Foods Inc. (CAG) are rising after the food products company announced that it turned a profit for the fiscal first quarter. ConAgra’s previous winning streak was broken by market volatility in early September; could this earnings report propel the stock to all-time highs? Let’s find out.
The maker of PAM cooking spray, Marie Calendar frozen dinners and Hunt’s ketchup had a generally solid quarter. On the one hand, adjusted earnings jumped 49% year-on-year to $0.61 per share. Analysts were expecting $0.48 EPS, so ConAgra posted a 27% earnings surprise.
On the other hand, net sales fell 4.6% year-on-year to $2.67 billion. This missed the $2.73 billion consensus estimate by 2.2%. According to management, ConAgra’s sale of its Spicetec Flavors & Business, as well as its JM Swank business, reduced sales by 2%.
ConAgra’s top and bottom lines benefitted from a strong showing from its Lamb Weston potato products business. The company will actually be spinning off the Lamb Weston business later this year. After the spin-off, ConAgra will have four reporting segments: Grocery and Snacks, Refrigerated and Frozen, International and Foodservice.
At the same time, ConAgra has been expanding its packaged foods business, particularly in the area of gourmet Mexican Food. This week, ConAgra bought out Frontera Foods Inc. and Red Fork LLC. According to management, the company is making these changes so that it can build a “higher quality revenue base.”
But will these efforts pay off? Right now, it’s too soon to tell. For the current fiscal year, analysts are projecting a 1.7% year-on-year drop in sales, and 14.9% EPS growth. In the meantime, I consider CAG a C-rated Hold.
The fact is that it’s going to take more than one earnings surprise to convince me that CAG has turned around its financial statements. The company is still struggling to grow sales, and it’s making a lot of changes to its lineup. Instead of taking a chance with ConAgra, I’d go with a company that’s already growing sales and earnings. An example of this is Hormel Foods (HRL), which I currently recommend in my Blue Chip Growth newsletter.