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ConAgra Net Rises 44%; Company Boosts Outlook
posted by admin on 22/12/06

Increased marketing expenditures on key supermarket brands began to pay off.

ConAgra Foods Inc. reported a 44% rise in fiscal second-quarter earnings as increased marketing expenditures on key supermarket brands began to pay off.

Citing expected sales gains and faster-than-anticipated divestitures, the Omaha, Neb., manufacturer of such brands as Healthy Choice, Marie Callender's and Reddi-wip raised its full-year outlook to a range of $1.28 to $1.33 a share from $1.17 to $1.22. The average estimate among analysts had been $1.25 a share.

But Chief Executive Gary Rodkin said during a conference call that ConAgra is "appropriately cautious about inflation," which he described as "more of a headwind in coming quarters and fiscal "08" than previously thought. Accordingly, ConAgra plans to take price increases where possible to offset it, he said.

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Net income in the quarter ended Nov. 26 totaled $219.6 million, or 43 cents a share, compared with $152.5 million, or 29 cents a share, a year earlier. The consensus had been 33 cents a share. Income from continuing operations surged 79% and operating profit margins on key consumer brands added more than 200 basis points.

Sales rose 2.9% to $3.09 billion from $3 billion. While those for its biggest business, Consumer Foods, slipped slightly, those for Food and Ingredients jumped 10% while Trading and Merchandising gained 3%. International Foods was down less than 1%.

Shares of ConAgra were trading recently at $27.41, up 2%, on volume of 5.4 million compared with average daily volume of 3.1 million. Earlier, shares reached a high of $28.35, surpassing the high of $27.08 reached Wednesday.

The latest per-share results included three cents of items that impact comparability, as seven cents in benefits from assorted items were partly offset by four cents in restructuring expense. Discontinued operations accounted for two cents of EPS, down from seven cents a year ago.

Mr. Rodkin attributed much of the improved results to "rapid expansion of our operating margins" as well as gains from "earlier-than-expected completion of key divestitures."

"We're beginning to get some traction on our priority investment brands," Mr. Rodkin said on the call, noting that advertising and promotional spending rose $20 million from a year earlier. "We plan to accelerate our marketing investments in the second half," he said.

Fresh ad campaigns recently launched on such brands as Healthy Choice, Orville Redenbacher and Hebrew National. As a result, Redenbacher popcorn posted double-digit growth, the CEO said.

The company also slashed spending on deals with the supermarket trade to push product.

During the quarter ConAgra shed its refrigerated packaged meats businesses -- including its Butterball turkey operation -- along with a pizza business, an oat-milling operation and its interest in a malt joint venture as management made good on vows to concentrate on higher-margin units.

The company noted that future quarters won't benefit as much from interest income on divestiture proceeds as that cash is reinvested into the company or goes into share repurchases.

In raising full-year estimates, Mr. Rodkin said productivity gains are expected to be the primary driver, but he also mentioned marketing spending he said should lead to sales gains for core brands, a major piece of his turnaround strategy.

ConAgra spent $66 million on capital spending in the quarter, up from $60 million a year earlier. Projected capital spending for the full year is $450 million.

Analysts largely cheered ConAgra's financial performance in the quarter and some expressed surprise at the numbers.

"We clearly have missed the calendar 2006 turnaround story here," Prudential Equity analyst John McMillin said in a note to clients. He retained his underweight rating but raised his fiscal 2007 earnings forecast to $1.34 from $1.30 a share, and increased his target price on the stock to $24 from $23.

ConAgra has a divided following on Wall Street. Citigroup analyst David Driscoll, who rates its stock a buy, said recently he expects Mr. Rodkin to "deliver on aggressive targets for cost savings" over the next three years.

But J.P. Morgan Securities analyst Pablo Zuanic, who rates the stock underweight, contends that planned marketing investments may be inadequate, and that most cost savings will need to be reinvested in overhead.

Credit Suisse's David C. Nelson told clients this week that while ConAgra "might not hit a wall for some time...we continue to believe that the brands in this portfolio lack strength, and we have not yet seen evidence that CAG can drive topline growth." He rates the stock neutral.

In initiating coverage recently with an equal-weight rating, Lehman Brothers' Andrew Lazar said of the high valuation ConAgra stock carries that "the market may be assigning too little weight to the risks that could well confront ConAgra in coming quarters… ."

The analysts mentioned don't personally own ConAgra stock but their brokerages seek to do business with companies covered in their research reports.

Write to Richard Gibson at

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