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Conagra Foods, Inc. - An Underappreciated Earnings And FCF Story

 February 14, 2013 09:27 AM

(By Mani) ConAgra Foods, Inc. (NYSE: CAG) is poised to raise its 6-8 percent long term EPS growth target following the consummation of the Ralcorp deal and has become a top value play in the food space as its shares are cheap on both P/E and cash flow basis.

ConAgra completed the Ralcorp acquisition on Jan. 29, making ConAgra one of the largest packaged food companies in the US, and the number one North American private label food manufacturer.

The company's consolidated sales of about $18 billion include 43 percent branded, 32 percent commercial, and 25 percent private label food sales. The deal is expected to drive $225 million, 35 cents, in supply chain synergies over the next four years —a figure that appears reasonable given past deal comparables and ConAgra's overlap with Ralcorp in the area of grain procurement and usage.

[Related -Hertz (HTZ) Investors Hurting As Stock Tumbles On Revised Annual Forecast, ConAgra (CAG) calls active]

"In our view, the acquisition of Ralcorp provides increased scale in private label and creates an advantaged consolidator in US grains-based private label food with integration savings to come in the near-term," UBS analyst David Palmer wrote in a note to clients.

The outlook for the next one to two years appears bright as the food inflation cycle appears to have turned into more of a tailwind for food companies, and this tailwind—for grain-based packaged food names like General Mills, Inc. (NYSE:GIS), Kellogg's Co. (NYSE:K) and ConAgra, in particular—appears likely to continue into 2014 if crop conditions are close to normal this year.

[Related -Conagra Foods, Inc. (CAG): Too Much Downside To Consider Buying Weakness]

The Ralcorp buy would well position ConAgra to benefit from this trend.

"We estimate that the addition of Ralcorp could theoretically be ~$0.31 (15%) accretive to GAAP EPS in FY14," Palmer said.

Moreover, the cash accretion will likely be greater due to a step up in deal related amortization. The new ConAgra will have stronger cash flow than peers with near 100% free cash flow (FCF) conversion and a FCF yield of 7.5 percent. Rival, General Mills and Kellogg have FCF yield of 6.2 percent and 5.8 percent, respectively.

"Beyond fiscal 2014, synergies, restructuring programs at Ralcorp, and debt pay down could drive 6 percentage point EPS growth a year through FY15-FY17, which should allow for reinvestment along with a higher level of EPS growth than the company's stated 6-8 percent target," Palmer noted.

The next catalyst for ConAgra shares will be the upcoming CAGNY conference, which will be held between Feb. 18-22, during which ConAgra plans to update FY13/14 EPS guidance. The company also expects to provide color regarding its increased long-term EPS growth target in the summer.

While ConAgra is up 25 percent over the last year, the stock remains cheaper than peers and significantly cheaper on a free cash flow basis. This is notable since ConAgra should deliver high-single-digit EPS growth, which is at or above the peer average—something that will become increasingly clear at CAGNY and then in the summer.



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