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ConAgra Foods (CAG)
ConAgra Foods Gets a Healthy Boost in Profit
With the Peter Pan peanut butter recall fiasco of 2007 now nothing but a distant memory, ConAgra Foods has recovered and posted huge gains in profits this quarter. The company's stock price is on the move this morning after the release of third-quarter earnings data, which reported a 60 percent jump in profits over the same quarter last year. As if this news wasn't enough to get investors' hearts pumping, the company has also announced that it will be selling a portion of its business for a sizeable sum. The company has decided to take advantage of market conditions and strike while the iron is hot, but have they underestimated the contributions this segment has brought to their overall business?
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ConAgra Foods has reason to celebrate today's release of its third-quarter earnings statement which handily beat analysts' earnings forecasts of 39 cents per share on revenue of $3.17 billion. The company reported revenue of $3.53 billion and net income of $309 million, or 63 cents per share, for the quarter ended February 24, a significant spike from the results of the same period last year. Even though last year's third quarter profits were marred by the costs related to the Peter Pan peanut butter recall, a 60 percent rise in profits has given investors reason to cheer and the company's stock has risen over 6 percent in early trading. These higher-than-expected profits have been attributed to company initiatives to increase prices and improve sales, but ConAgra thinks it can do more to improve the bottom line.
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In addition to the earnings news, the company made another announcement today that it will be selling its commodities trading group so that it can focus more on its core food business as well as repurchase shares of company stock. In a $2.1 billion cash and stock deal, ConAgra will sell the commodity trading and merchandising operations group to the Ospraie Special Opportunities fund, which is an affiliate of Ospraie Management, an investment management firm. The new business will be renamed Gavilon LLC and ConAgra will receive $1.6 billion in cash as well as $525 million in payment-in-kind securities of the newly established Gavilon holding company. The commodity trading and merchandising segment of ConAgra's business has played an important role in supporting the company's profits during quarters where other areas of the business struggled, but company leaders decided that it would be better to sell now given the strength of the commodity trading market. Chief Executive Gary Rodkin said, "Given our existing and ongoing emphasis on our core strategic food platforms, along with the strength of the commodities cycle, we believe this is an excellent time to exit this business."
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ConAgra is known for its consumer food brands such as Chef Boyardee, Healthy Choice, Orville Redenbacher, and Egg Beaters. These brands have faced difficult circumstances over the past few quarters as expenses related to ingredients and energy costs have risen. For the most recent quarter, profit for the consumer foods business dropped 8 percent as a result of these higher costs even as sales increased by 8 percent. The commodities trading business, which buys and sells energy, fertilizer, and other agricultural commodities, helped offset this performance with profits that more than tripled over last year. Rodkin doesn't anticipate any changes to ConAgra's 2009 earnings forecast as a result of the sale but the company did raise the fiscal 2008 earnings forecast to a range of $1.80 to $1.85 per share. It remains to be seen if the company made the right move in selling this lucrative portion of the business now as opposed to holding on for the long-term.
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