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Analyst Actions: ConAgra Foods. Inc Target Price Raised $2 at Credit Suisse; Shrs Near Yr Highs

Carbo-Loaded 2Q Beats Our Estimate, But CAG Cannot Live On Potatoes and Flour Alone; Raising Target Price to $27 (from $25). The stock is trading at $26.37, up 0.18 or 0.7%), close to a year high $26.60.

ConAgra adjusted EPS of $0.47 was $0.03 ahead of our estimate because of outperformance in the Commercial Foods division, but we are keeping our earnings estimates unchanged due to continued gross margin erosion in Consumer Foods. Our concern about the portfolio's structural lack of growth compared to its peers is the overriding issue. The stock is now trading at a 4% valuation discount to its peer group which is more than fair given the nature of the portfolio.

Valuation. We are raising our target price to $27/share from $25/share to reflect the improved earnings visibility. Our target price implies a 13x P/E against our calendar 2013 EPS estimate of $2.05. This is a 10% discount to the U.S. food group, in-line with its historical relative average.

EPS guidance unchanged. The company coaxed expectations lower for 3Q due to the timing of protein inflation and marketing expenses, but said that that this will be fully offset in 4Q. The original guidance for "gross margin recovery" in the Consumer Foods division is no longer on the table. Our FY12 EPS forecast of $1.81 is at the low end of management's guidance for low-mid single digit EPS growth.

2Q results better than feared. Sales growth was in-line with our estimate of 8% and adjusted gross margin was much better at 23.3%, down only 60 bps from last year. Operating profit grew 5% versus our estimate of a 2.5% decline.

Consumer Foods rather weak. Sales grew 4% with pricing up 5% and volume down 1%. Volume held up better than we feared given the weak tracking data from Nielsen. This is probably due to the company's push for increased distribution in unmeasured dollar stores and convenience channels, which is bigger than people realize. Profits fell 6% and operating margin fell 130 bps to 12.4%.

Commercial Foods quite strong. Sales grew 16% with excellent pricing and volume in potatoes and flour and adjusted profit grew 26%. Lamb Weston has rebounded strongly from last year's spoiled potato crop and is bucking the weak trends in foodservice with strong growth in sweet potatoes. Management says that Commercial Foods is not "over-earning," and that is good, but this division's track record of volatility and lack of transparency gives us a pause. Flour milling is about 30% of this division's sales and will have a tough time repeating the strong results in FY 12.

Acquisitions remain the priority. While the company's strong operating cash flow ($1.2B+) and balance sheet provide management with two big levers for earnings power (acquisitions and/or share repurchase), the same could be said for a lot of companies in the staples space. Private label acquisitions remain the focus, but our experience is that TreeHouse and Ralcorp have deeper relationships with the potential sellers out there. The National Pretzel acquisition is expected to add $0.04 to EPS in its first 12 months

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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