Credit Suisse says: "Confidence Is Contagious at ConAgra;
Raising Estimates and Target Price to $36 (from $32)"
"What does it mean for the state of the branded foods industry
when the most anticipated presentation of the CAGNY conference
comes from a branded company extending aggressively into private
label? ConAgra management provided a compelling argument for why a
disciplined company with best in class operating principles can add
value in the highly fragmented private label industry. The big idea
is to leverage scale across the organization where it makes sense
(back office, R&D, and supply chain) and keep the two
organizations separate where necessary (sales force and marketing).
A "coordinator" at key customer accounts will be necessary to make
sure the two sides coordinate with each other and provide the
customer with coherent category management solutions.
"FY 14 EPS Guidance Appears Close to Market Expectations. Some
may have been hoping for a more aggressive guide, but management by
now is well-versed on the wisdom of managing expectations. Our math
is that the FY13 guidance of $2.15 builds to $2.49-$2.52 in FY 14
if the base business grows 6-8%, but management will wait until
June before giving more clarity. The quick close of the Ralcorp
deal makes it difficult for management to speak with confidence
about the operating condition of the assets or the speed at which
integration and consolidation will proceed. Our observation is that
management took a big haircut of perhaps $70M to Ralcorp's original
EBIT expectations owing to "slower private label trends." But, as
we see it, no one really believed that the Ralcorp numbers were
achievable anyway. Favorable financing of the deal and good
performance in the core business compensated for the miss. We are
raising our FY 13 and FY 14 EPS estimates to $2.15 and $2.45 from
$2.06 and $2.40, respectively, and our target price to $36 (from
$32). Our TP is based on 14x our CY14 EPS estimate of $2.55. We are
raising our FY2015 EPS estimates to $2.67 from $2.65.
"Our level of confidence in the ConAgra management team is as
high as it has ever been. Rodkin, Gehring, Hawaux, Maass, Ross, and
Bolles have shown that it is possible to turn a holding company
into a dependable operating company even if the brands aren't all
top tier. But now they will have to do it again with the culturally
unconsolidated Ralcorp business, and with even lower profit margins
and higher working capital requirements. New operating guidelines,
new SAP systems, and new rules on procurement need to be applied.
It will be a long road, but we think CAG is up for the journey.
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