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Good Outlook for ConAgra Foods

August 19, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at ConAgra Foods, Inc. (CAG), a $13.47 billion market cap company, which is one of the larger U.S. food companies with a number of widely known brands.

Main risk

ConAgra is one of the larger U.S. food companies and operates through four segments: Consumer Foods, Commercial Foods, Ralcorp Food Group and Ralcorp Frozen Bakery Products. The company´s top 15 brands each generate more than $100 million in annual sales.

However, ConAgra doesn´t have a big pricing power, as consumers can shift to lower-priced products. The fierce competition across the landscape will persist as consumer spending remains constant.

Ralcorp's portfolio

It acquired Ralcorp Holdings, Inc. a leading producer of private-brand foods and food service products. Private label cereal, cereals, pasta, frozen bakery, snacks, sauces and spreads are all areas in which ConAgra gained an important presence. Due to the acquisition, the retailer will be the largest private label packaged food company in the U.S., creating a leading private-label firm with $18 billion in consolidated annual sales. Further, cost synergies will come soon; $300 million are forecasted by fiscal 2017.

Huge budget

In order to expand its presence in international markets that are fast-growing regions. Moreover, ConAgra has been investing hard. Two objectives are product innovation ($93 million) and marketing support ($474 million). For example, ConAgra's Healthy Choice frozen Greek yogurt is a consequence of this philosophy.

Payment history

Since 1976, ConAgra has a dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. Although the current dividend yield is 3.5% which is considered high enough to protect investors´ purchasing power.

Revenues, margins and profitability

Looking at profitability, the decline in revenue led earnings per share decreased in the most recent quarter compared to the same quarter a year ago (-$0.76 vs $0.45). During the past fiscal year, it reported lower earnings of $0.68 versus $1.87 in the prior year. This year, Wall Street expects an improvement in earnings ($2.26 versus $0.68).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

CAG

ConAgra

5.76

KRFT

Kraft Foods Group Inc.

52.34

NSRGY

Nestle SA

15.61

 

Industry Median

7.68

The company has a current ROE of 5.76% which is lower than its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking for those levels, Nestle (NSRGY) could be the option. And for investors looking at higher levels, Kraft Foods Group Inc. (KRFT) is the right bet. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1408415047141.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 45.3x, trading at a premium compared to an average of 24.2x for the industry. To use another metric, its price-to-book ratio of 2.5x indicates a premium versus the industry average of 2.02x while the price-to-sales ratio of 0.8x is above the industry average of 1.3x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,786, which represents a 13.44% compound annual growth rate (CAGR).

1408415018222.png

Final comment

As outlined in the article, the company made a great strategic move considering that it is an effective way to leverage its existing manufacturing platform. Additionally, it plans to expand in promising markets; that, as well as the money for innovation and marketing strategies, makes me bullish on this stock.

Hedge fund gurus like David Dreman (Trades, Portfolio), Brian Rogers (Trades, Portfolio), Jeff Auxier (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), John Keeley (Trades, Portfolio) and John Buckingham (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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