ConAgra Has a Major Edge in the Grocery Aisle

 | Dec 20, 2012 | 12:16 PM EST
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Some guys get it. Gary Rodken is one of those guys. He's the chief executive officer of ConAgra Foods (CAG), and he runs the hottest consumer packaged-goods company in the world right now.

This morning's numbers were extraordinarily good, with 17% income growth and, more importantly, 8.9% revenue growth, fabulous for a revenue-starved industry. The maker of such well-known brands as Pam, Swiss Miss, Chef Boyardee, Hebrew National and, most importantly, Healthy Choice, has very few peers right now, and shareholders have been richly rewarded with a 14% gain before the bountiful dividend. Compare that performance with those of H.J. Heinz (HNZ), up 9%, Kellogg (K), up 11%, Campbell Soup (CPB), up 7%, and General Mills (GIS), once the gold standard, up only about 3%. Coca-Cola (KO) and PepsiCo (PEP) have increased only about 5%.

It's really just Hershey (HSY), which has gained 19%, B&G Foods (BGS), which has moved up 22%, and McCormick (MKC), the spice company, which has rallied 28%, that are beating Rodken's ConAgra.

The best news here, though, is that I think ConAgra is not done. It's spending $5 billion to buy the private-label food maker Ralcorp (RAH), and that should make 2013 an even better year, especially when you consider the head of steam it's got going from 2012.

Let me walk you through the reasons.

First, Rodken sees the way the world is going. His best of the old ConAgra is Healthy Choice, which is fabulous for those who want to eat healthier and not gain weight. The brand seems to be reinvigorated, and Rodken is spending a lot on research and development to make things better.

Second, ConAgra had been held back by skyrocketing raw costs. The straight-shooting Rodken very famously said that raw costs were "going through the roof" during the period of raging commodity inflation. Not anymore. His raw costs have come in and come in somewhat dramatically, and this has allowed for gross margin expansion and terrific cash flow.

Finally, with this Ralcorp acquisition, Rodken can now participate in the hottest area of all consumer packaged goods: the private-label brand.

Executives from the supermarket industry feel very challenged these days. They are getting squeezed by the packaged-goods companies that want to raise prices in a way that turns off consumers, and the consumers themselves are strapped because of the lack of job growth. The margins were never any good in the business anyway, and now that uber-discounters Costco (COST), Wal-Mart (WMT) and Target (TGT) have moved aggressively in the market, as well as drugstore chains Walgreen (WAG) and, most successfully, CVS Caremark (CVS), it's just getting worse and worse.

Their way of fighting back? Private label. That's why Kroger (KR) has been acting so well. It's by far the biggest seller of private-label products of any of the supermarkets.

But this move isn't lost on even the best operators. Last night, Walter Robb, the co-CEO of Whole Foods (WFM), told a terrific story of his embrace of private label, and the profit margins are really helping to fuel the bottom line for the best-of-the-best player in the business.

Rodken knows you need both. You need branded, because the margins are still very good, but you need private label, because that's where the big guys are going. Robb told us you can't take the private-label share much above 25% -- the customers don't like more than that. So, again, that plays perfectly into ConAgra's hand.

Personally I feel great about Rodken's success. He has been determined to reinvigorate this company and put it in the elite portion of the consumer packaged-goods sector. Today's quarter tells you that he has arrived there, and then some.

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