It's been an interesting few months for packaged food companies. Volume trends have looked softer than expected as consumers continue to feel a pinch, but input costs have also eased up. Most significant, though, was the acquisition of Heinz (NYSE:HNZ) by Berkshire Hathaway (NYSE:BRK-A,BRK-B) and 3G and the near-immediate upward revaluation of the sector.

Against that backdrop, ConAgra (NYSE:CAG) continues to be a “yes, but...” company. As in, “yes, the RalCorp deal helps, but the company has to execute on the integration” or “yes, input costs are lower, but the company is having to spend on marketing/promotion to prop up weak volume”. While I liked ConAgra as an undervalued play in the sector back in December, I don't feel as strongly about it today given the significant move in the sector and this stock in particular.

Tepid Results For Fiscal Q3
ConAgra's results for the fiscal third quarter weren't bad relative to Street expectations, but it's hard to call them good.

Revenue rose about 13% for the period, about half a point less than the Street expected. Consumer sales were up a reported 7%, but organic growth was flat on a 3% volume decline. This continues the company's non-negative streak to seven quarters, but it's hardly what I'd call a strong result, particularly compared to recent reports from General Mills (NYSE:GIS) and McCormick (NYSE:MKC). Commercial sales were up about 1% for the quarter and the sales contribution from Ralcorp was slightly below most expectations.

ConAgra did do a little better on margins. Cost inflation does seem to be moderating, and the company's 120bp gross margin improvement was slightly better than expected. A big commitment to marketing mitigated this, though, as operating income rose 10% with 3% organic segment income growth in the consumer business.

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A Silver Medal For A New JV
It looks like food companies are taking a page out of the pharmaceutical sector playbook and learning to cooperate a bit better for mutual advantage. Following partnerships/ventures like that between Heinz and Coca-Cola (NYSE:KO), ConAgra announced back in March that it was forming a flour milling joint venture with Horizon Milling – a joint venture between Cargill and CHS.

This business, to be called “Ardent Mills”, will combine ConAgra's North American milling business with the existing Horizon Milling operation, giving ConAgra a 44% stake in the venture. Upon the close, the JV plans to do a cash-out transaction that is expected to produce between $800 million and $1 billion to the JV owns – or as much as $440 million to ConAgra.

All in all, this is a decent move. The milling operations are about 40% of the company's commercial sales, and the cash will be welcome. While there will be some near-term “dysynergy” from the deal due to the higher assumed interest rate for Ardent Mills, the longer-term picture is one of modest accretion for ConAgra.

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The Bottom Line
Nielsen tracking data pretty much pegged the 3% volume decline for ConAgra in the fiscal third quarter, so the recent improvement in the trailing 12-week data to a decline of 1% should be a little encouraging. Although segments like frozen dinners are doing poorly, other business like peanut butter seem to be showing share gains against Smucker (NYSE:SJM) and Hormel (NYSE:HRL).

All in all, though, it's hard for me to be as excited about ConAgra given the move in the stock. I still believe the company can deliver mid-single digit revenue growth and low double-digit free cash flow growth by virtue of the Ralcorp deal and ongoing cost/profit improvements. Relative to the resulting fair value of about $36.50, though, it's just not that exciting of an opportunity. Even so, if I absolutely had to own a U.S. packaged food company, I could see the argument for owning ConAgra as there's still meaningful potential upside to both market share/volume and profit margins.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Tickers in this Article: CAG, GIS, MKC, HNZ, KO

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