ConAgra Foods, Inc: Economic Analysis

Author: Artem Zaiets(36981)

Summary

This paper’s purpose is to look through and analyze the activities of ConAgra Foods within food processing industry. It will touch the areas of the financing of the company as well as those of the business strategies and compare the company’s major competitors’ operations over the past 5 years. The statistics will also project the expected future growth under the rate of 5% over a 3 year period and look at the sensitivity analysis. Using the projected data, this paper will also show the internal growth rate of the company as well as the external funds required for the future.

Introduction

ConAgra Foods, Inc. is an American packaged foods company that is located in Omaha, Nebraska that was founded a whole century ago in 1919. The company produces and sells products under 27 different brand names, most of which are popular and known only within the North America. Some of ConAgra’s major brands include Hunt’s, Healthy Choice, Marie Callender’s, Orville Redenbacher, Slim Jim (snack food), Reddi-wip, Egg Beaters, Hebrew National, P. F. Chang’s, and Bertolli ready meals. The products of the company diverse from cooking oil to hot dogs, frozen dinners, peanut butter, hot cocoa and many more.

As was mentioned earlier, the company’s brands are known mostly in North American, including Canada, the U.S. and Mexico, nevertheless, the company still competes with European and Asian packaging food companies in the market and holds a quite strong position in the list.

1. Financial Strategy

There are many tools and ratios that can be useful in order to find out a firm’s financing strategy over a course of period. In this passage, I will be discussing 3 of them: debt to equity ratio, payout ratio and retained earnings during the period from 2010 to 2014, and will compare them with other major competitors that the company has in the food processing industry.

The first tool that will be used is debt to equity ratio. This ratio indicates the proportion of equity and debt that a company uses to finance its assets to know whether it is conducting a riskier but more profitable business or vice versa. From the chart we can observe the comparison of this ratio with 2 other industry-related companies (Appendix Table 1). As can be seen from the chart, over the course of these 5 years, the ratio for ConAgra Foods, Inc. jumped drastically from 0.7862 to 1.752 in December 31^st of year 2013. This can be explained by the fact that the company decided that it did not have sufficient revenue in order to operate further, and as was mentioned earlier the higher the ratio is, the more risk the company takes but the more money it receives as a turn-over at the same time. We can observe the same situation with Kraft Foods, an American company which was founded in year 2012 as a grocery manufacturing and processing conglomerate. A new company has relatively ‘less’ to lose than an older one, especially when a company such as ConAgra Foods is nearly 100 years old. Indeed, in the short run, according to microeconomic rules of companies, the latter need to have as much revenue as possible in order to operate in the long run. That is why the ratio for the second company is relatively high. As for Nestle which was founded in year 1905 and that is headquartered in Switzerland, we can observer that the situation is rather more stable compared to the 2 other companies. In year 2012, it reached a maximum of 0.4494 ratio in debt to equity which is quite low considering this industry is capital-intensive.

The payout ratio, on the other hand, shows the amount of dividends per share to earnings per share that a company makes. For investors, the ratio can show whether the company’s dividend payments seem to be appropriate and sustainable or whether the company’s paying out more than it can sustain. New and-or fast growing companies usually focus on re-investing their earnings so the business can grow, and as a result, tend to have lower dividend payout ratios. Conversely, larger companies usually have a higher payout ratio. Let us analyze the data from Table 2 (Appendix Table 2).

ConAgra Foods company’s payout ratio during the period of 2010 to 2011 has been always higher than 40%, and in 2012 even reached 84.8%. This shows that the company decided to increase the relations with their shareholders, or increase the amount of people contributing to the company by having a more attractive dividend payment. As for the new company Kraft Foods, in 2012 the ratio was at 18.2% which is not surprising. However, the company in the next year decided to increase the dividend payments to 48.2%. The reasons may be the same as ConAgra Foods company’s and also that the company does not have much operating cost at this stage. Nestle in years 2010 to 2011 was quite low, but increased to a reasonable amount in the next years.

Yet another tool can be used in defining a company’s financial strategy and it is the retained earnings. Retained earnings are usually used to pay off debts and/or gain additional assets (Appendix Table 3). Table shows the relationship between the retained earnings with long-term, short-term debts, as well as non-current assets and stockholders’ equity for ConAgra Foods company. The short-term debt in the company is kept relatively low at all times in the company, which shows that it spends its earnings to keep them down. Non-current assets, however, get increased by twice as much in year 2013. The explanation for this may be that the company decided to increase investments for its many brands recognition, as well as some new equipment.

1.2. The relationship between the financing strategy and the business strategy

Since ConAgra Foods, Inc. has so many brands under its name, a wise strategy for the company would be to increase their investments on those brands that have the highest potential, make them more recognizable around the U.S. The company has, therefore, undertaken a few financial actions that would reflect on their business operations. An example of that is the dividend action. The dividend continues to represent one of the highest payout levels among consumer food companies today. As was shown earlier in the chart with the payout ratios of the company and its competitors, we could indeed see that the ratio was the highest for ConAgra Foods, Inc. Restructuring charges is the next strategy that the company recently implemented. The balance of this charge will reflect upon the volatile and non-volatile costs relating to the implementation of restructuring activities, including programs designed to reduce the company’s ongoing operating costs. In other words, the company also focuses on reducing operating costs. This does make sense, knowing that this industry is quite capital-intensive. The company also announced plans to divest its seafood and domestic imported cheese businesses.

1.3. Internal Growth Rate

The internal growth rate of a company illustrates the highest level of growth which is achievable by the company without obtaining external financing. The formula for calculating the growth rate is as following: IGR = Plowback ratio × return on equity × . The plowback ratio is simply 1 subtracted by the payout ratio (1 – payout ratio), and the return on equity is the net income divided by the shareholders’ equity (ROE = ). Using the latest financial data of the company for year 2014, we get that IGR = (1 – 0.527) × × =0.473×0.058×0.272=0.00746 or roughly 0.75%.

A conclusion of this is that without external financing, the growth rate of the company is mediocre. In case of any questions considering number (Appendix B Balance sheet of the company).

2.1. ConAgra Foods spreadsheet

From this table we can observe how much external finance company needed to maintain future growth. It means that company will either sell equity or borrow debt to obtain extra cash for future growth. Required external finance was calculated, simply, by subtracting future total assets from future total liabilities and shareholders’ equity. In case of any questions considering number (Appendix B Balance sheet of the company).

Appendix A

2.1. Financing strategy

Table 1

The numbers were taken from December 31^st of each consecutive year.

Table 2

Table 3

Appendix B

1.3. Internal growth rate; 2.1. ConAgra Foods spreadsheet

Balance sheet of the company

References

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Financials.morningstar.com, (2015).Balance Sheet for ConAgra Foods Inc (CAG) from Morningstar.com. [online] Available at: http://financials.morningstar.com/balance-sheet/bs.html?t=CAG&region=usa&culture=en-US [Accessed 29 Jun. 2015].

Gurufocus.com, (2015).ConAgra Foods Inc (CAG) Debt to Equity (%). [online] Available at: http://www.gurufocus.com/term/deb2equity/CAG/Debt+to+Equity+%28%25%29/ConAgra+Foods+Inc [Accessed 29 Jun. 2015].

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Finance.yahoo.com, (2015).CAG Balance Sheet | ConAgra Foods, Inc. Common Stoc Stock – Yahoo! Finance. [online] Available at: https://finance.yahoo.com/q/bs?s=CAG+Balance+Sheet&annual [Accessed 30 Jun. 2015].

Finance.yahoo.com, (2015).CAG Income Statement | ConAgra Foods, Inc. Common Stoc Stock – Yahoo! Finance. [online] Available at: https://finance.yahoo.com/q/is?s=CAG+Income+Statement&annual [Accessed 30 Jun. 2015].