<p> April 20, 2005 Ian Madsen, MBA, CFA, Editor [email protected] Marla Harkness, MBA, CFA, Senior Analyst Research Digest Paresh Gandhi, B Com (Hons.), Res. Assistant </p><p> www.zackspro.com 155 North Wacker Drive Chicago, IL 60606 ConAgra Foods, Inc. (CAG-NYSE) $26.38</p><p>NOTE TO READER: ALL COMMENTS SINCE LAST REPORT ARE HIGHLIGHTED </p><p>Overview ConAgra Foods, based in Omaha, Nebraska, is the largest foodservice manufacturer in the United States and the second largest retail food company in the country. Its leading brands include Hunt’s, Wesson, Butterball, Peter Pan, Chef Boyardee, Healthy Choice and many others. In FY2004, CAG completed two major transactions. It sold its discontinued chicken processing business to Pilgrim’s Pride for $300 million in cash and 25 million Pilgrim Pride shares. In addition, it completed the sale of the U.S. and Canadian operations of UAP for $540 million in cash and about $60 million in preferred securities. The company has divided its business into three new operating segments: Retail Products (58% of FY 2004 sales); Foodservice (26%); and Food Ingredients (17%). Analysts note the company needs to expand distribution and make investments in brand building in upcoming quarters in order to boost sales across all segments. In 3Q05, CAG posted an EPS of $0.34 (excluding one time items) compared to EPS of $0.39 posted for the same period last year. Revenues were $3.6 billion, up 1.3% on a y-o-y basis. In 3Q05, the company also reported a number of one-time items. CAG sold 10 million of its shares in Pilgrim’s Pride for over $280 million, which resulted in a $0.22 per share gain. The quarter included adjusted charges of $0.20 per share relating to aggregate adjustments to the book value of assets, $0.03 per share for early retirement of debt, $0.04 per share for SEC costs, and a gain of $0.02 per share from a legal settlement. Many analysts feel performance in the third quarter was depressed for three primary reasons. First, high protein costs significantly decreased packaged meat margins. Second, several manufacturing issues resulted in a loss of volume, lower margins, a weak mix and higher costs of business. Final, SAP implementation costs exceeded estimates in the quarter. </p><p>The company recently discovered accounting errors related to tax payments dating back to FY03 and FY04. CAG is in the process of restating its financial statements, but expects after-tax profits to be reduced by $150-$200 million or $0.29-$0.39 per share. Analysts have identified the following issues as critical to an evaluation of the investment merits of CAG: </p><p>Strengths/Opportunities Weaknesses/Threats Underperformers Divested – CAG sold most of its meat Process of Rationalizing Brand Portfolio Confusing – The processing business and its chicken business has been many portfolio changes at CAG and the numerous one time sold to Pilgrim’s Pride. CAG now derives about 90% of its charges have confused investors. These are continuing operating profit from high-margin packaged food. through fiscal 2005. Excellent Brand Portfolio – CAG has improved its brand Large Well-Financed Competitors – With huge packaged image. Two of its segments – Food Service and Food food companies as competitors, some analysts question Ingredients – did well in the fiscal first half. whether or not CAG has the resources to compete. Operational Improvement- Company had taken a number Poor Earnings Visibility – Analysts have had difficulty of steps, like price increases, to cover increased input coming up with baseline EPS numbers or making near term costs, SKU rationalization, and implementation of SAP. estimates. Disposition of businesses- Disposition of commodity- High Costs-Company witnessed higher input costs in the oriented businesses, like beef, pork, etc., without major reported quarter. High protein meat costs significantly dilution or significant drop to cash flow bodes well for CAG. decreased the packaged meat margin. </p><p>More information on the company is available at its website: http://www.conagrafoods.com/ CAG’s fiscal year ends May 31. </p><p>Sales</p><p>FY2003A FY2004A 1Q05A 2Q05A 3Q05A 4Q05E FY2005E FY2006E Retail $8,668.10 $8,434.10 $2,014.20 $2,339.75 $2,077.00 $2,210.00 $8,786.00 Food Services $3,597.90 $3,714.40 $904.60 $989.67 $886.00 $1,022.00 $3,751.00 Food Ingradient $2,204.40 $2,373.60 $577.00 $691.00 $608.00 $770.00 $2,646.00 Total $16,939.10 $14,522.10 $3,495.80 $4,020.42 $3,570.00 $4,041.65 $15,196.00 $15,617.63 Y-o-Y Growth -14.27% 8.25% 5.67% 1.26% 2.00% 4.64% 2.77%</p><p>In the fiscal third quarter of 2005 (ended February 28) the company posted sales of $3.6 billion, representing a 1.3% increase over the same period last year. Retail products sales were $2.1 billion, down 1% from the same period last year. Volume declined 3%, and average net pricing increased 2%. Volume declined because the company did not undertake seasonal promotions during the transition period. The company has stated that it will invest in promotions later at a time when returns can be expected to be higher. In the Foodservice segment, Product sales were $886 million, 1% above last year. In the Food ingredient segment, sales increased 9% to $608 million, due to CAG’s merchandising/trading operations and better performance in Wheat Milling.</p><p>Margins</p><p>Margins FY2003A FY2004A 1Q05A 2Q05A 3Q05A 4Q05E FY2005E FY2006E Operating 8.62% 10.27% 8.50% 11.54% 9.65% 9.06% 9.54% 9.85% Pre-Tax 7.22% 7.93% 6.82% 9.80% 7.89% 7.57% 7.78% 8.28% Net 4.77% 5.48% 4.02% 5.44% 6.29% 5.56% 5.24% 5.23%</p><p>In 3Q05, consolidated operating income fell to $345.5 million or to a 9.7% operating margin, showing a decline of 160 bps due to higher input and manufacturing costs and SAP implementation challenges. COGS increased 140 bps and SG&A grew to 11.8%. The Retail products segment posted an operating profit of $303 million versus $329 million reported during the same period last year. It includes a $10 million brand impairment charge and a benefit of $17 million from favorable legal settlements in the current quarter. An increase in input and packaging costs negatively impacted the entire segment, but it was especially felt in the packaged meat operations. The Foodservice products segment posted an operating profit of $3 million, down from $70 million in the year-ago period, due to impairment charges related to strategic changes in the culinary products manufacturing network, as well as fire damage at a specialty potato products facility. In the Food Ingredient segment, operating profit increased by 10% to $60 million, reflecting strong performance from grain-based food ingredients, due to higher volumes and improved market conditions. </p><p>Earnings Per Share</p><p>Fiscal year ends May FY2003A FY2004A 1Q05A 2Q05A 3Q05A 4Q05E FY2005E FY2006E Digest High $1.48 $1.49 $0.28 $0.48 $0.34 $0.38 $1.46 $1.71 Digest Low $1.48 $1.49 $0.28 $0.47 $0.34 $0.33 $1.42 $1.53 Digest Avg. $1.48 $1.49 $0.28 $0.47 $0.34 $0.36 $1.44 $1.59 Digest YoY growth 0.68% 21.74% 2.42% -12.82% -13.24% -3.07% 10.29% Zacks Consensus $1.45 $1.60</p><p>Zacks Investment Research Page 2 www.zackspro .com In the 3Q05, CAG reported EPS of $0.34 (excluding one time items), slightly better than previously issued guidance. It beat consensus by $0.02 primarily due to better-than expected results in its commodity trading group. Excluding the one-time items, the company expects fourth-quarter EPS to modestly exceed the third quarter EPS. </p><p>One analyst (Piper Jaffray) lowered 4Q05 EPS to $0.36 because the management expects to see only modest improvement this quarter in comparison with the fiscal third quarter. The analyst expects that high input cost pressures will continue, and that CAG will not yet be receiving the full benefit of such initiatives as further price increases and SKU rationalizations in this quarter. </p><p>Another analyst (Deutsche Bank) lowered fiscal 2005 EPS to $1.46 to reflect the pressure of input costs on packaged meat as well as potentially less profit from the Food Ingredients segment. </p><p>Target Price/Valuation</p><p>Of the 7 analysts in our Digest survey, one gave CAG a Positive rating, three gave it a Neutral rating, and three are Negative on the stock. </p><p>Target prices given by the analysts range from $24 (CSFB) to $32 (Deutsche Bank). The Digest average target price is $26.50. Three analysts (J.P. Morgan, Merrill Lynch, FTN Midwest Research) rated the stock but did not provide any target price. </p><p>The analyst (CSFB) with the lowest target price applied DCF analysis by EV/EBIDTA and P/E valuation multiples. </p><p>Additional information The company did not repurchase shares during the fiscal 3Q. In the reported quarter, capital expenditures for property, plant, and equipment totaled $97 million, compared with $89 million last year, mainly due to additional investments made to update strategic information systems. </p><p>Long-Term Growth </p><p>Analysts’ long-term growth projection for the next 3-5 years lies in the 5% (Prudential) to 9% (Merrill Lynch, Piper Jaffray) range. The digest average long term growth rate is 7.7%. ConAgra is focused on improving margins and returns on capital over the long term with its multi-year marketing, operations, and information systems initiatives. The company expects operating trends to improve over the next few quarters due to continued improvements in the manufacturing network, price increases to cover increased input and packaging costs, more efficient supply chains, and implementation of its SKU reduction program. It is anticipated that the removal of low margin and low volume products from the shelves will allow the company to focus sales efforts and manufacturing capacity on higher margin and higher volume products. One analyst (Piper Jaffray) holds a tepid near-term view on the stock, but is encouraged by the fact that CAG is moving out of its commodity business (by divesting its beef, chicken, canned seafood, and cheese operations over the past two years) and is focusing on its branded packaged goods businesses. Over the long-term, the analyst believes that CAG has a relatively good earnings growth potential. </p><p>Zacks Investment Research Page 3 www.zackspro .com Individual Analyst Opinions Detailed summaries of analysts’ price targets, sales, margin and earnings estimates on an annual and quarterly basis by segment are provided in an accompanying excel spreadsheet. </p><p>POSITIVE RATINGS</p><p>Deutsche Bank –Stock is rated Buy with a price target of $32. </p><p>NEUTRAL RATINGS</p><p>Merrill Lynch– The stock is rated Neutral. Analyst believes that CAG’s earnings creditability needs to be re-established in spite of the company’s best efforts to put a positive outlook on the reported quarter’s results. Analyst expects a continued lack of earnings momentum at CAG.</p><p>FTN Midwest Research – The stock is rated Neutral. Analyst notes that stock is currently trading at 16X FY06 EPS, and believes that there is limited downside risk to the stock. The analyst expects that a recovery in operations due to SAP implementation will be gradual. </p><p>Prudential – The stock is rated Neutral Weight with a price objective of $25. </p><p>NEGATIVE RATINGS</p><p>CSFB – The stock is rated Underperform with a price target of $24. Thinks management is starting to see benefits from productivity including changing the mix to higher margin SKUs, investing in SAP, streamlining distribution centers, taking costs out of manufacturing, and leveraging unified sales and IT. Considering the high number of second and third tier brands in the portfolio, the analyst believes the upside could be big. However, thinks the company needs more strategic marketing to be in the top-tier.</p><p>J. P. Morgan – The stock is rated Underweight with no given price target. </p><p>Piper Jaffray – The stock is rated Underperform with price target of $25. Analyst maintains Underperform rating owing to relatively low corporate earnings growth rate comparisons and weak gross profit margin trends in the packaged foods segment. However, analyst believes that CAG will maintain a relatively good earnings growth potential in the long term. </p><p>Zacks Investment Research Page 4 www.zackspro .com</p>