ConAgra rates a `hold' for unpredictable costs

Your Money

February 18, 2007|By Andrew Leckey | Andrew Leckey,Tribune Media Services

What potential do my shares of ConAgra Foods Inc. have?

- K.T., via the Internet

The giant food company with a helter-skelter mix of brands and lingering accounting problems has been marching to the beat of a different drummer for more than a year.

If you believe that some previously neglected products hold promise for the future, you'll agree with the three-year turnaround plan launched by Chief Executive Officer Gary Rodkin, former chairman and CEO of PepsiCo North America.

Rodkin is emulating the marketing style of his former employer by focusing increased advertising on the likes of Orville Redenbacher popcorn and Hebrew National kosher products. He has been selling off less-profitable businesses such as Mama Rosa's refrigerated pizza, as well as closing plants and cutting jobs.

ConAgra (CAG) shares are down 4 percent this year after a gain of 33 percent in 2006. Amid the extensive restructuring efforts, earnings rose more than 40 percent in its most recent fiscal quarter on stronger sales in a number of brands. It has also bolstered its financial situation by reducing debt.

Some ConAgra brands, such as Healthy Choice and Banquet, are undeniable big sellers. The company also is the largest food-service supplier of french fries in the United States and the Asia-Pacific region, with customers such as McDonald's and Sysco.

But it has a batch of also-ran brands as well, due in part to a long history of lackluster brand support and little innovation. A weak and disorganized product mix still holds the company back on the grocery shelves and in the eyes of many investors.

ConAgra's diverse portfolio of products includes Chef Boyardee, Egg Beaters, Slim Jim, Pam, Parkay, Reddi-wip and Swiss Miss. Its Peter Pan peanut butter brand is suspected by federal investigators in an outbreak of salmonella cases.

A consensus of analysts' ratings on ConAgra shares is currently a "hold," according to Thomson Financial. That consists of one "strong buy," one "buy," five "holds" and three "sells."

Although Rodkin has been moving to lessen the effect of commodity costs, they still make its results unpredictable.

Accounting problems have been a black eye for ConAgra, which has had to restate earnings several times in the past five years. Most recently, the Securities and Exchange Commission sued three former executives, alleging that their "knowing or reckless misconduct" resulted in overstated profits in 1999 and 2000.

Earnings for its current fiscal year ending in May are expected to decline 3 percent and the forecast for next fiscal year is an 8 percent increase. The five-year annualized growth rate is projected to be 7 percent.

T. Rowe Price New Horizons Fund has been recommended to me but it doesn't look as though it has done well lately. What do you think?

- R.M., via the Internet

It doesn't offer the razzle-dazzle aggressiveness of some other small-cap funds, but it is less volatile.

This low-turnover fund holding more than 300 stock names in a variety of industries has been run since 1987 by John Laporte, whose discipline and stock-picking ability have stood the test of time. A low annual expense ratio of 0.84 percent that hasn't fluctuated much over the years is another plus.

The $7.2 billion T. Rowe Price New Horizons Fund (PRNHX) is up 6 percent during the past 12 months to rank around the midpoint of small growth funds. Its three-year annualized return of 12 percent puts it in the top one-fourth of its peers.

"This is a good fund with a talented manager and is best suited to investors who want to complement some of their larger-cap, more conservative holdings," said Karen Wallace, analyst with Morningstar Inc. in Chicago. "It shouldn't be a core holding, but should rather play a supporting role."

Aided by more than 30 T. Rowe Price sector analysts, Laporte looks for small-cap firms with strong, predictable earnings growth. In addition, he also holds more mid-cap stocks than most of its competitors.

The stock decline of the for-profit education company Apollo Group hurt last year's results. Due to its diverse holdings, New Horizons also won't do as well when narrow portions of the market excel. Its asset size is large for a small-cap fund, which can mean more difficulty in building and exiting positions in small-cap firms without affecting the stocks' prices.

Health care is currently its biggest asset concentration, at 20 percent, followed by consumer services and business services. Top stock holdings recently were NII Holdings, Henry Schein, Davita, O'Reilly Automotive, Apollo Group, Coventry Health Care, Toll Brothers, Oshkosh Truck, Roper Industries and Laureate Education.

This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment. T. Rowe Price has not been disciplined by SEC or other authorities in the past decade.

I recently moved to a new town and am shopping for a new bank. What fees should I look out for?

- T.D., via the Internet

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