Consumer label warnings can hurt ConAgra
CAG has broken critical support and it is an avoid.
By 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.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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