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ConAgra Foods (NYSE: CAG) stock rose 4% earlier this month after the company announced it would spin off its Lamb Weston food-service business into a separate publicly traded entity. This was the latest in a series of moves by new CEO Sean Connolly to revive the company.
Shares of the food giant are up 14% in the past year, while the S&P 500 index is flat in the same period. That would normally lead investors to believe that the company is performing well, but that is not actually the case.
The stock is up, presumably because investors believe the company’s turnaround is gaining traction. But even though ConAgra is aggressively restructuring itself, its core brands remain in decline.
There is a fundamental shift in consumer eating habits taking place right underneath ConAgra’s feet. So far, the company has not significantly addressed these challenges, and a spinoff by itself does not change that fact.
Moving the Pieces Around
ConAgra will spin off Lamb Weston, which produces frozen potatoes, sweet potatoes, appetizers and other frozen vegetable products. Lamb Weston services primarily restaurants, including fast-food chains. It generated approximately $2.9 billion in revenue in the most recent fiscal year. The remaining company will be called ConAgra Brands.
The ConAgra spinoff comes as a means to try to create value for shareholders. ConAgra has experienced a prolonged slowdown in its three core brands: Healthy Choice, Chef Boyardee and Orville Redenbacher. ConAgra sells a number of other shelf-stable brands like Slim Jim that are also struggling.
Consumers – particularly in developed nations like the United States – are taking a harsher view of processed, pre-packaged foods. Consumers are demanding fresher foods like organics and are increasingly turned off by canned, shelf-stable and frozen goods. This has caught ConAgra by surprise, and the company has posted flat or declining sales in four of the past six quarters.
The announced spinoff comes just weeks after ConAgra sold its private-label business, Ralcorp Holdings, to TreeHouse Foods for $2.7 billion. Investors hailed the move, although it should be noted that ConAgra bought Ralcorp only two years ago for $5 billion. ConAgra’s private-label business posted a $1.4 billion operating loss in fiscal 2015. Ralcorp ended up costing ConAgra billions of dollars in losses, only to be sold for nearly half the original purchase price.
Now the company is trying to significantly cut costs and sell off assets to improve its financial position. In October, ConAgra said it would slash around 1,500 jobs as part of its goal to trim $300 million from its cost structure over the next three years.
More Spinoffs Won’t Fix What Ails ConAgra
Analysts suspect this won’t be the last spinoff for ConAgra. Many believe the company could split up again. Possible candidates for future spinoffs include ConAgra’s commercial foods segment or its stake in the flour-milling joint venture Ardent Mills.
ConAgra’s stock price has outperformed the market over the past year, as investors appear to be optimistic that these moves will benefit the company. However, it remains to be seen what, if any, progress will be achieved. Spinning off assets into independently-traded entities simply moves around the pieces.
Fundamentally, ConAgra’s core problems have not been solved. Sales of its top brands are in decline, and until that reverses, investors should be wary of the company. Revenue in the consumer brands category, which includes the top three brands, fell 1% last fiscal year. The results would have been even worse had it not been for the benefit of an extra week in fiscal 2015.
Investors should avoid the stock, particularly because it has rallied considerably while the fundamentals have not improved. Shares of ConAgra trade for a lofty 18 times forward earnings estimates. That is a premium to the S&P 500, which seems unwarranted given the company’s poor operating performance.
As a result, there seem to be more reasons to dislike ConAgra, even while the company splits itself up.
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