ConAgra says still wants Ralcorp but can do without

NEW YORK Thu Jun 23, 2011 2:14pm EDT

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NEW YORK (Reuters) - ConAgra Foods Inc (CAG.N) tried to assure investors on Thursday that its future will be bright even if it does not succeed in buying Ralcorp Holdings Inc RAH.N, which has already turned down ConAgra twice.

The maker of Hunt's ketchup, Chef Boyardee pasta and Pam cooking spray said it still wants Ralcorp, which makes store branded food for supermarkets, and said it would tolerate a lower short-term credit rating to make "the right acquisition".

"As long as we stayed investment grade we would be willing to go down for some period of time," said John Gehring, ConAgra's chief financial officer.

Even without Ralcorp, ConAgra expects to generate earnings growth of 6 percent to 8 percent a year over the long term, due to its plan to raise prices, expand abroad, launch new products and make acquisitions, said Chief Executive Gary Rodkin.

Despite the weak economy crimping consumers' shopping habits, and costs soaring for everything from meat to packaging, Rodkin said ConAgra's fundamentals were in "better shape than they have ever been".

But for the current fiscal year, which began in May, profit growth will be below its long-term goal, due to mostly high commodity costs, ConAgra said, adding that profit in the current quarter will be less than a year ago, as price increases have not kept pace with accelerating inflation.

Shares of ConAgra, which also posted disappointing fourth-quarter profit, were down 0.2 percent at $25.36 in midday trade, outperforming the Standard & Poor's Packaged Food index .GSPFOOD, which was down 1.4 percent.

Consumer Edge Research analyst Robert Dickerson said ConAgra's results were weighing on the sector, along with a warning from Treehouse Foods (THS.N) that sent its shares down 8.4 percent.

"The perceived safety of food in a risky global market comes into question if inflation in the near term increases faster than pricing is potentially able to be passed through," Dickerson said. "ConAgra has a healthy balance sheet and strong cash flow, giving it optionality and flexibility with respect to future EPS growth."

ConAgra said its priorities for cash use were dividends, acquisitions and investments to boost sales and profits, such as new product introductions and capacity expansions.

PRICING LAGS INFLATION

In the just-ended fiscal fourth quarter of 2011, net income rose to $254.9 million, or 62 cents per share, from $90.6 million or 20 cents per share a year earlier when there were more shares outstanding.

Excluding one-time items, ConAgra earned 47 cents per share. On that basis, analysts on average were expecting 48 cents, according to Thomson Reuters I/B/E/S.

Net sales rose to $3.21 billion. Analysts expected $3.19 billion.

Profit declined in the company's consumer foods segment, due to a 9 percent increase in costs.

Price increases on cooking oil-related products, frozen foods and snacks contributed to higher sales, but volume fell 3 percent as those price increases hurt demand.

There will be more price increases ahead, ConAgra said.

ConAgra said 2012 earnings should grow at a low- to mid-single-digit rate from the $1.75 per share it earned in fiscal 2011.

The outlook reflects mid-single-digit sales growth and a 7 to 8 percent increase in costs, which Morningstar analyst Erin Lash said is up slightly from a prior estimate and may spell trouble for ConAgra, since several of its brands are not No. 1 in their category.

"They operate with less brand equity than some of their peers," Lash said. "They could be challenged to offset some of these higher costs."

Due to the lag between cost inflation and price increases taken to offset the inflation, ConAgra said full-year earnings growth would be concentrated in the back half of the year, with first-quarter profit below the 34 cents per share it earned a year ago.

(Reporting by Martinne Geller; editing by Dave Zimmerman, John Wallace, Matthew Lewis and Bernard Orr)

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