It's been easy to criticize ConAgra (NYSE:CAG) management over the years, as relatively ham-fisted management of junior varsity brands has led to pretty pathetic growth and margin performance relative to its peers. What's true about the past is not automatically true about the future, though, and I think ConAgra is in perhaps the best shape it has been in the time I've watched the company. There's still a lot of work to be done in improving margins and cash generation, but in an overvalued sector ConAgra looks like an interesting relative value.

Decent Results To Close The Fiscal Year
ConAgra reported 35% overall revenue growth, a figure that was very clearly heavily influenced by the acquisition of Ralcorp. Absent the nearly the $1 billion in acquired revenue, sales would have been up about 6% - which is still pretty good for this sector of late. 

SEE: Key Players In Mergers And Acquisitions

Consumer sales were up a reported 7%, or 2% on an organic basis as volume increased 3% and price/mix took 1% of sales growth away. Commercial was up 5% as reported for the quarter, and Ralcorp operations brought in $962 million of revenue – a number that's hard to reconcile with the year-ago figure for the March 2012 quarter of $1,062 million because of the non-overlapping calendar.

Margins were a mixed bag. It's not unusual at all for the integration of a major acquisition to be disruptive, but it sounds like ConAgra management is seeing solid synergy realizations from the deal. Even so, gross margin was basically flat and operating margin declined 30 basis points (operating income was up a reported 31%), and these were a little soft relative to expectation.

FY2014 Should Be A Good Year For Margins
Fiscal 2014 is shaping up as an important year for ConAgra's management. If this management team wants to build/maintain creditability that this is a new era for ConAgra, they're going to have to deliver some of the margin leverage that lies at the center of almost every bullish thesis on ConAgra.

First off, agricultural input cost inflation should be much milder over the next twelve months than it has been recently. Not unlike General Mills (NYSE:GIS), Kraft (Nasdaq:KRFT), and Nestle (Nasdaq:NSRGY), ConAgra found that significant price increases led to significant volume decreases and operational deleverage throughout the system. Consequently, there were impacts to both sales and margins as the company absorbed what were in many cases double-digit cost increases.

Second, the Ralcorp integration should continue to generate operating cost savings and better margins. So far management has done well with an “under-promise/over-deliver” approach, but expectations are almost certainly going to increase after this quarter.
 
Balancing The Businesses Will Be Tricky
One of the challenges ConAgra management will face is managing a large branded food business simultaneously with a large private label business. With the Ralcorp deal, about 25% of the company's revenue will be from private label (and I'd be tempted to include the Commercial business with that), and that's a business that has seen its own bout of pricing pressure lately.
 
On the branded side, ConAgra has actually been looking better of late in terms of U.S. market share in many categories. With possible disruption in categories like peanut butter and tomatoes from Hormel's (NYSE:HRL) acquisition of Skippy and the acquisition of Heinz (NYSE:HNZ) and opportunities to gain share in dry/frozen dinners, the branded business here may be in better shape than commonly thought.
 
The Bottom Line
I've gone back and forth on ConAgra's stock, largely in response to the market's shifting sentiment towards the packaged food space. Last quarter, for instance, I thought things were getting a little too hot and I suggested stepping back – and the stock obliged with a greater-than-5% drop.
 
Now, though, I'm a little more bullish on the stock. There were still some earnings quality issues this quarter and I'm not sold on the rebound in ConAgra's branded volumes, but I think the balance favors a positive slant. I believe management can transform long-term sales growth of around 3% into more than double that rate of free cash flow growth, and I believe these shares are undervalued below $40, though I acknowledge an above-average risk profile to this stock.

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