Food Industry Is Hungry For Profits

Companies fight to lure bargain-hunters with the best deals, but the strategy doesn't always do the trick.

ConAgra Foods is preparing to report fourth-quarter earnings on Thursday morning, but analysts warn the popularity of grocery stores' private-label brands could chew into profits. According to one stockpicker, however, the company's lower input costs are helping it close the pricing gap.

After grocery store operator Kroger announced a meaty 12.7% boost to first-quarter profits aided by its strong private-label business, which contributed 35% of the quarter's sales, investors questioned whether popular food lines are getting squeezed by bargain-hunting shoppers. UBS analyst David Palmer doesn't think this will be a problem for Omaha, Neb.-based ConAgra Foods ( CAG - news - people ), which does some private-label business but is largely driven by its popular brand portfolio that includes Chef Boyardee, Swiss Miss and Hunt's

According to Palmer, moderating input costs have resulted in narrowing price gaps between private-label and ConAgra products. On Tuesday, he upgraded the company to "buy" from "neutral" based on his belief that the company's improved execution has been undervalued by the market.

"We believe ConAgra should benefit from moderating inflation, improved innovation and pricing, a value-oriented portfolio and macro trends benefiting eating at home," Palmer said. "While we continue to think that additional investments need to be made in ConAgra's brands, we are encouraged by recent initiatives to do so, and do not believe our call depends on the company immediately becoming 'best in breed.' "

ConAgra shares closed Wednesday's trading session up by 25 cents, or 1.3%, at $20.03. Analysts polled by Thomson Reuters have been expecting fourth-quarter earnings of 41 cents a share and sales of $3.3 billion.

The food business has become increasingly competitive as companies fight to convince consumers that they provide the best values on everything from edibles to household basics