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ConAgra Splits Its Menu, but We're Not Hungry

While breaking up has proved valuable for peers, we think lagging pricing power and profits will dim ConAgra’s prospects.

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In less than 18 months at the helm of ConAgra, CEO Sean Connolly has charted a new course. After selling the private-label and spice operations, management has split the consumer foods ( ConAgra Brands (CAG)) and commercial foods (Lamb Weston (LW)) businesses. Despite the contention that this will allow for more focused execution, we aren’t convinced that this strategic step will enhance the firm’s competitive edge. ConAgra Brands still operates with a portfolio of second- and third-tier brands that have failed to amass much pricing power. Further, profits in the consumer business materially lag peers, and even with plans to extract $300 million in costs (at the low end of the 4%-7% of cost of goods sold and operating expenses that its peers target shedding), we don’t forecast the company will entirely close the margin gap with other branded packaged food firms. As a result, our stance is more tempered than the market’s with regard to ConAgra’s prospects, and we suggest investors remain on the sidelines. Those looking for exposure to the space should consider Pilgrim’s Pride (PPC) instead.

Like others that have pursued a similar course--including Kraft, Ralcorp, Sara Lee, and Fortune Brands--management says this strategic endeavor stands to unlock material value, an opinion we struggle to share. For one, we don’t believe ConAgra can enhance its brand intangible asset, given that its mix consists of second- and third-tier brands that lack pricing power. Further, we don’t think the firm will post operating margins on par with the high teens to low 20s of its peers, given its lagging brands and the inherent complexity in its supply chain (it sources 90% of its products from just one location).

Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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