ConAgra (CAG) Could Provide 'Tasty' Returns Following Ralcorp (RAH) Acquisition - Barron's

December 6, 2012 12:12 PM EST
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ConAgra (NYSE: CAG) foods is lower on the session though there might be more upside for the stock moving forward, according to a recent Barron's piece.

Last week, ConAgra announced a deal in which it would acquire Ralcorp (NYSE: RAH) for $90 per share, or total value of $5 billion excluding debt. Shares have been flat since rising 4.5 percent on the deal, a sure sign it met investor approval.

The combined company will have sales $18 billion, inclusive of $4.5 billion in private-label revenue. Some pundits have voiced that branded and private-labels don't coexist well under the same roof, though the segment accounted for about 7 percent of ConAgra's sales, or $950 million, over the last four quarters.

Barron's notes that private-label sales are also more lucrative, with segment sales increasing 15 percent over the last three years to $108 billion. Private-labels also account for 17 percent of all consumer packaged-goods sales in the U.S.

Last week, Jefferies upgraded the stock to Buy, calling the Ralcorp acquisition a "game changer" for ConAgra. He sees ConAgra growing profits by 10 percent per year over the next five years. Cohen & Steers backed up the sentiment, saying that the combination will help drive private label growth in a "fairly unexciting" industry.

The two company have little overlap in products, save for the peanut butter segment.

One risk is economic recovery. As incomes and confidence grow, consumers might move away from private-labels and back into branded goods, with the brands also making a strong ad push in the process. Additionally, grocers are looking for new and unique items which will attract more shoppers to their store. Further, higher commodity prices will cut in to profits and ConAgra still has a good amount of debt to deal with before aiming for another acquisition.

ConAgra will pare back stock buybacks, but it retain its annual dividend. Should investors stick it out, they could be rewarded with an "appetizing" return.

Shares of ConAgra are down about 0.5 percent on the session Thursday.

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