After reporting better-than-expected earnings this morning, shares of ConAgra Foods Inc (NYSE:CAG) are heading lower. CAG is off by nearly 1% after climbing more than 3% in pre-market trading.
When excluding non-recurring items, CAG posted earnings of 59 cents per share, beating analysts’ expectations of 52 cents per share. Prior to those exclusions CAG posted a net loss of $954.1 million, or $2.23 per share — so CAG beat Wall Streets estimates if we play with the numbers a little.
But regardless of what figure we use for comparison, EPS tumbled from a year ago, when CAG reported earnings of 62 cents.
Revenue was nearly $3.9 billion, below Wall Street’s expectations of $3.94 billion and CAG’s revenue of $3.95 billion in the same quarter a year ago.
Packaged food companies are getting a lot of attention this week, particularly after Kraft Foods Group, Inc. (NASDAQ:KRFT) announced its acquisition of H.J. Heinz. Many industry experts believe more merger deals will be coming soon, with ConAgra being part of that mix.
Let’s take a look at some reasons why CAG could be in a merger deal soon:
- Branding: CAG products have great brand recognition — Egg Beaters, Hunt’s, Hebrew National, Reddi-wip, Pam cooking spray, Swiss Miss, Marie Callender’s, and my personal favorite Slim Jim, just to name a few. Another company may want some name recognition, and buying brands is usually the cheapest way.
- Customer shifts: The packaged food industry is struggling as more Americans choose fresh foods over processed and packaged offerings. In order to survive, ConAgra may be forced to pair up with someone else. Diversity and size help when a business is fighting through an industrywide shift.
- New leadership: ConAgra CEO Gary Rodkin will be stepping down next month in favor of former Hillshire Brands CEO Sean M. Connolly. This change in upper management can possibly bring a different mindset about how the business needs to grow. Connolly may have relationships with people who would be willing to make a deal with ConAgra.
The Bottom Line
The idea of ConAgra making a deal with another company can be exciting and possibly very profitable. But, at this point it is all speculation and not enough of a reason alone to buy shares.
ConAgra is a good business, but with shifting consumer demands the company is experiencing negative growth. Until earnings results begin improving, investors are better off staying on the sidelines.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
