I added CAG to my investment idea list after a review of stocks mentioned in Morningstars’ dividend newsletter. Over the last month, CAG has been trading between $22-$23
Please refer to the stock review explained post if you have questions on what I look for in this analysis. Click on this Surfmark if you want to see the source data for this stock review
1- Business Performance Risk (-) and intrinsic stock returns (-)
|FCF / Sales||FCF / Sales has been varying quite a bit over the last ten years, ranging from -3% to 8%. It is now at 6.9% but was negative in fiscal years 2008 and 2009.|
|ROE||Return on equity is now at 14.6, at the lower end of recent performance and below the 5-year average of 16.4%.|
|ROA||Return on assets is currently at 6.2%, in line with the 5 year average of 6.5%.|
|Revenue Growth|| Over time, CAG has been decreasing in size with an average growth over the last 5 years of -3.7%. I am not sure what has been driving this trend as looking at CAG's cash flow statement does not seem to indicate that the company has been selling assets/businesses which could explain the negative growth.|
However, EPS has been growing at about 5.7% on average over the last 5 years despite the negative growth in earnings.
|Cash distribution to shareholders|| Dividend: CAG is paying a 3.8% dividend yield on a payout of ~50%.|
Stock repurchases: Over the last 5 years, CAG has bought back about 15% of its shares
In terms of intrinsic stock returns, an investor could expect the following:
- 3.8% dividend on 50% earnings payout
- 3% growth, better than recent performance, using 20% of earnings on a 15% ROE
- 2.2% share buybacks, using the 30% earnings remaining on the company’s current 7.4% earnings yield
Hence overall, CAG’s intrinsic stock returns could be in the 9% range, below my personal threshold.
2- Balance Sheet Risk (+)
|LT Debt / Equity||While CAG's currently carries some debt, the level does not seem unreasonable, with a Debt/Equity ratio of 0.7x currently|
|Current Ratio||CAG's current ratio seems to be appropriate at 1.9x, above what the company has been targeting before 2008.|
3- Valuation Risk (+)
|Price to earnings ratio||CAG's P/E is currently at 13.5x, lower than the S&P 500 and the stocks 5-year average of 17.2x|
CAG’s business performance is lower than what I expected and contradicts my starting assumption that CAG has an economic moat. While I don’ t think that the business is terrible, I am concerned by lower ROIC/ROA than I usually am comfortable with and the constant decrease in revenue over time. In addition, CAG does not seem positioned to deliver satisfactory intrinsic returns and while valuation could be attractive it is not enough to attract me to CAG as a long term investment candidate for my portfolio. I will pass and not perform a stock analysis of CAG.
Have you looked at CAG recently? What was your conclusion?
You can find some investment ideas, more one-page “stock reviews” as well as more in-depth “stock analysis”, including valuation and copies of my financial model on my investment research blog: Margin of Safety Investing.
Many happy returns!