ConAgra's New Recipe

The food giant is shedding its commodity trading unit to better focus on building its packaged-goods biz

Even though scores of new investors have been pouring into commodities trading, one big player wants out of the game. Shares of ConAgra Foods (CAG) were up more than 6% on Mar. 27 after the Omaha food company announced the sale of its commodity trading operations, as well as better-than-expected revenues for its packaged foods business.

Even though commodity prices are booming, Wall Street had been expecting the divestiture as the company under CEO Gary Rodkin attempts to remake itself as a force in consumer packaged goods.

ConAgra shares were trading in the range of $23.50 after disclosure of the sale to an affiliate of New York-based Ospraie Management , an investment management firm specializing in commodities, for about $2.1 billion. The price represents a premium of 12 to 13 times earnings, said Deutsche Bank Securities (DB) analyst Eric Katzman, who considers the sale "fairly valued."

Looking for Consistency

Although the operation has been wildly profitable amid the commodity boom, the company said it was preferable to focus on gaining consistency in earnings cash flow. "They deserve credit for selling the good business and fixing the one that isn't running as well," Katzman said, referring to the consumer foods unit, whose profits have lagged.

Earnings for the commodity trading operation during the quarter ended Feb. 24 more than tripled, to $199 million, while sales nearly doubled, to $564 billion. For the 39 weeks ended Feb. 24, operating profit grew nearly fourfold, to $439 million, while sales climbed more than 80%, to $1.4 billion. That was more than the commodity operation earned in all of fiscal 2007, and virtually the same level of revenues at $1.5 billion. Those sales represented just over 12% of the company's revenues last year of $12 billion.

The trading arm sources and trades grains, fertilizer, and energy products including natural gas and crude oil. It includes the No. 3 grain handling and storage system in the U.S.

Consumer Products Vet at the Helm

ConAgra said it will apply aftertax cash proceeds of $1.4 billion to repurchase stock, reduce debt, and invest internally.

The company has been attempting to reinvent itself under Rodkin, a veteran of consumer foods giants PepsiCo (PEP) and General Mills (GIS) who took over as CEO in October, 2005. "The company was living on fumes," the 55-year-old Rodkin said in an interview earlier this month. "Earnings were inconsistent, the stock was soft. There was a lot of noise."

Rodkin divested other commodity-based businesses representing 20% of sales. In 2006, for example, it sold its Butterball, Armour, and Eckrich meat brands to rival Smithfield Foods (SFD) for $575 million."It was a difficult space—cyclical, highly regulated and low margin," Rodkin says. Those divestitures led to speculation that ConAgra also would unload its commodity trading operations.

Boosting Investment in New Products

Rodkin said the company's future is in developing its stable of consumer brands, which include Healthy Choice, Chef Boyardee, Egg Beaters, Hebrew National, Hunts, and Marie Callender's. He centralized operations. Previously the businesses were so fragmented that the company had little clout with retailers. Rodkin also boosted investment in new products. For example, the company introduced a new line of Healthy Choice entrées, Café Steamers, that the company expects to generate revenues of $100 million in its first year.

Third-quarter sales for the company's consumer foods operations were better than expected, up 8%, to $1.8 billion compared with a gain of 4.2% for the first three quarters of the year. But operating profits for that business fell 8.1%, to $206.6 billion, largely as a result of higher prices for commodity ingredients.

ConAgra's net income rose 66%, to 63¢ per share, and net income increased 61%, to $309.1 million, while sales increased 20.9%, to $3.5 billion.

Proving the Skeptics Wrong

Wall Street is still skeptical that ConAgra can reinvent itself as a premier consumer goods marketer in the mold of PepsiCo, Kraft, General Mills, and Kellogg. Katzman, for one, has a hold on the stock. "They focused investor attention on the consumer business, they still have to execute," he says.

Rodkin acknowledges skeptics' assertion that the company had underinvested in its brands. Now, with the franchises performing better, the job is to "prove it's for real and get their minds changed."

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