010570 ConAgra May Have Larger Issues than Probe

Chicago - ConAgra Food Inc.'s restatement of earnings and related changes in its accounting practices will help fourth-quarter financial results, but those gains could be offset by the food giant's ongoing profitability problems, analysts said.

The accounting snafu, which includes fictitious sales contracts at various vendor sites, has also led to an “informal inquiry” by the U.S. Securities and Exchange Commission, ConAgra said. The disclosures seem to have both good and bad aspects, complicating an already difficult earnings picture for ConAgra, analysts said.

“We believe there are other issues,” said Prudential Securities analyst Jeff Kanter. “That is why we are not raising our (earnings estimates) numbers.”

ConAgra is the No. 2 U.S. food retail supplier behind the Kraft Foods division of Philip Morris Cos., with Healthy Choice meals and Butterball turkeys among its many brands. It warned in February of profit shortfalls related to a slowdown in the economy, and in March posted a 31% decline in fiscal third-quarter earnings.

Analysts said the Omaha, Nebraska-based company told them it would get a fiscal 2001 increase primarily in its fourth quarter from the restatement, which stems from improperly booked sales and other problems at its United Agri Products Cos. unit, a business that distributes seeds, fertilizers and chemicals to farmers.

Although the adjustment will boost reported numbers, it will not overcome that unit's profitability problems and lackluster results in other areas of ConAgra's business, analysts said.

Besides a troubled farm economy, ConAgra has been hurt by rising costs a and a questionable product mix in its retail division, analysts said. Operating profit in its packaged foods business fell 6.6% in the most recent quarter, as the company spent more on advertising and saw trade inventories shrink.

MORE SPINOFFS AHEAD?

“Until something happens, until you see some real quantifiable changes, people are not going to buy (the stock),” said Midwest Research analyst Christine McCracken. ConAgra has historically had troubles with its packaged-foods business, she said, and is in the process of introducing new products to revitalize retail sales.

ConAgra said Wednesday that its own audit revealed problems with the timing of recorded sales and other accounting issues at its UAP business, resulting in an earnings restatement dating back to 1998.

UAP accounts for about 13% of ConAgra's annual sales, which were $25.4 billion in 2000, and 9% of operating profit, which was $1.9 billion in the same period.

The unit is just one of several commodity-related businesses that analysts have speculated ConAgra might shed to help reach its stated goal of becoming more of a branded-foods business with a strong stable of retail brands. Among its present brands are Wesson cooking oil, Peter Pan peanut butter and Swiss Miss hot cocoa. Besides UAP, other commodity businesses include meat and poultry processing.

THROWING DIRT ON THE 'DIRT TO DINNER' MODEL

“We think the 'dirt to dinner' model is dead; and we look for most likely short term action be deconsolidation of the ag product segment,” wrote Salomon Smith Barney analyst Jaine Mehring in a March report.

In fiscal 2001, which ends May 27, the restatement is expected to boost net sales by $350 million and income by $127 million, or 15 cents a diluted share. Analysts said that 12 cents of the per-share earnings increase will come in the fourth quarter, with the balance spread over the first three quarters of the fiscal year.

Accordingly, pretax profits will be reduced by $79 million in fiscal 1998, $37 million in 1999 and by $59 million in fiscal 2000.

Some analysts, who declined to be named, said ConAgra's management advised them on Thursday to hold their earnings estimates, despite the positive quarterly shift from the agricultural business.

ConAgra shares fell 54 cents, or nearly 3%, to $20.07 in New York Stock Exchange trading, off their year high of $26.19.

Standard & Poor's on Thursday said the accounting issues at UAP will have no impact on the company's credit rating or outlook.

“It looks like the majority of issues were tied to when sales were booked,” said Midwest Research's McCracken. “That probably will affect the seasonality of their earnings stream, rather than the magnitude of their annual earnings.”

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