Consumer label warnings can hurt ConAgra

CAG has broken critical support and it is an avoid.

By Stock Traders Daily Sep 25, 2013 9:50AM

Ben Rellinger selects shredded cheese and milk at a Milwaukee grocery store. © Dinesh Ramde/APBy Neal Rau, Stock Traders Daily

ConAgra Foods (CAG), the maker of Chef Boyardee, Healthy Choice and Peter Pan, reported disappointing earnings last week, as the company said its net income for the first quarter was $144.3 million or $0.34 per share, down from $250.1 million or $0.61 per share in the same period last year. Sales also have missed views the past two quarters.

 

Private label and organic food competitors have been cutting into the company’s profits. The stock is down over 16% from its highs in early August. Is this a buying opportunity or should investors be selling?

 

Some brands are struggling to retain the past competitive advantages in the packaged food products industry, as big brands are being challenged by the popularity of private label products. They also face growing competition as smaller organic-foods rivals like Annies (BNNY) are taking market share. The Hain Celestial Group (HAIN) whose natural foods include Earth's Best and Terra chips, saw double-digit profit and sales growth the past 11 quarters.

 

ConAgra Foods has faced intense pressure from private label substitution over the past few years. It has responded by acquiring Ralcorp, which was the largest U.S. private label food manufacturer, at the end of 2012. Management believes that there are opportunities to focus the Ralcop business on organic growth.

 

The synergies resulting from this takeover are expected to fully materialize by the end of FY 2017. Ralcorp Food Group generated sales of $703.4 million in the most recent quarter, while Ralcorp Frozen Bakery Products sales were $238.6 million. The stock had held up well until recently, which according to the Stock Traders Daily trading report, is now trading below long-term support.

 

Despite the recent pullback in the stock, ConAgra shares are still up over 30% in the last 2 years. Underlying the strong performance in recent years has been the solid growth of operations. Between 2010 and 2013, ConAgra increased its annual revenues by a cumulative 30% to $15.5 billion.

 

However, recent headwinds have surfaced. The company’s consumer-foods segment reported a sizable decline in volume for the quarter, which the company called "difficult industry conditions." Most likely, the shift in consumer preferences toward more natural alternatives, as evidenced by the Hain Celestial Group’s recent profits referenced earlier.

 

Additionally, a proposed law that requires the labeling of genetically modified foods or ingredients has recently shaken up the packaged-food industry. Seed manufacturer Monsanto (MON), and food companies like ConAgra will be watching government bills that would require labeling of genetically modified foods. Connecticut has already passed a bill that requires the labeling of genetically modified foods, and similar proposals are under consideration in Vermont, New Hampshire and Maine.

 

The requirements would be in place to help consumers identify GMO foods, so they can make choices that are more informed. Critics say labels would send a message that GMO foods are dangerous when studies so far have mostly shown them to be identical nutritionally to non-GMO foods. The added cost of identifying and labeling such foods could lead to lower margins for food companies.

 

Typically, stocks in this sector offer investors a relatively low-risk and higher-dividend-yielding investment, and ConAgra shares may seem cheap after the recent pullback. However, the stock recently broke below long-term support. Long-term support has now converted to resistance, and as long as shares remain below converted resistance, we expect lower levels. The break of our long term support level is a red flag and not a buying opportunity.

2Comments
Sep 25, 2013 10:51AM
avatar
Author makes a nice attempt to dodge the real concern about GMO-- "Critics say labels would send a message that GMO foods are dangerous when studies so far have mostly shown them to be identical nutritionally to non-GMO foods".  My point is, nutritional value has nothing to do with it the GMO concern. The issue is what is the other junk in it doing to you.
Sep 25, 2013 10:47AM
avatar
Nice Critics say labels would send a message that GMO foods are dangerous when studies so far have mostly shown them to be identical nutritionally to non-GMO foods
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
265
265 rated 2
429
429 rated 3
612
612 rated 4
499
499 rated 5
525
525 rated 6
701
701 rated 7
533
533 rated 8
337
337 rated 9
131
131 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
COPCONOCOPHILLIPS9
TAT&T Inc9
DVNDEVON ENERGY CORPORATION9
EOGEOG RESOURCES Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.