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ConAgra Foods Could Offer Tasty Returns - CAG

July 29, 2009 | About:
ConAgra [NYSE:CAG] July 29, 2009: $19.55

52-week range: $13.52 (Dec. 3, 2008) - $22.66 (Aug. 15, 2008)

Dividend = $0.19 quarterly = 3.89% current yield


ConAgra Foods, Inc. supplies potato, other vegetable, spice and grain products to a variety of restaurants, foodservice operators and commercial customers. The Company operates in two segments: Consumer Foods and Commercial Foods. The Consumer Foods segment includes branded and private label food products, which are sold in various retail and foodservice channels, principally in North America. The Commercial Foods segment includes commercially branded foods and ingredients. Major brands include Healthy choice, Orville Redenbacher, Slim Jim, Chef Boyardee, Hebrew National, Banquet, Marie Callender’s, Reddi-Wip, Hunt’s and Swiss Miss.

Revenues and earnings dropped from $1.35/share to $1.06 /share from fiscal 2007 to 2008 as higher commodity prices squeezed margins [fiscal years end May 31]. Since then sales and profits have rebounded nicely. FY 2009 showed EPS of $1.52 – up 43.3% versus the depressed prior year. Zacks views for FY 2010 and 2011 are now running at $1.65 and $1.80.

Here are the per share numbers from continuing operations from the past few years as reported by Value Line:

FY ............Sales ........ C/F ......... EPS ......... Div. ..........B/V ....... Avg. P/E

2004 ........27.92 .......2.21 .........1.50 ........1.03 .........9.30 .........16.7x

2005 ........28.12 .......2.04 .........1.35 ........1.07 .........8.38 .........20.2x

2006 ........22.67 .......1.78 .........1.15 ........1.09 .........9.10 .........19.4x

2007 ........24.56 .......2.10 .........1.35 ........0.72 .........9.36 .........18.2x

2008 ........23.96 .......1.68 .........1.06 ........0.75 ........11.02 .........22.8x

2009 ........28.60 .......2.25 .........1.52 ........0.76 ........10.60 .........12.0x

At today’s quote of $19.55 the current year P/E is < 11.9x and the yield is a juicy 3.89%. Value Line rates ConAgra’s financial strength as ‘A’ and noted their ‘stock price stability’ falls in the top 1% of the 1700 companies in their research universe. They also list ‘earnings predictability’ at the 80% percentile (with 100th being best). Value Line puts CAG’s safety ranking in their highest category.

In short, CAG shares are low Beta (0.65), conservative, high-yielding and defensive. Not a bad combination in a punk economy. A return to just 14 times year ahead estimates would bring these shares back to $23.10 or up about 18% from the current price. Add in the 3.89% dividend and 20% - 25% total returns seem likely.

Here’s a creative way to play ConAgra that offers similar upside but without the same risk profile:

..............................................Cash Outlay ........ Cash Inflow

Buy 1000 CAG @$19.55 .............. $19,550

Sell 10 Mar. $20 calls @$1.30 ................................ $1,300

Sell 10 Mar. $20 puts @$2.00 ............................... $2,000

Net Cash Out-of-Pocket ............... $16,250


If ConAgra shares move up 2.3% or more to > $20 by March 19, 2010:

 The $20 calls will be exercised.

 You will sell your shares for $20,000.

 The $20 puts will expire worthless.

 You will likely have collected $380 in dividends.

 You will have no further option obligations.

 You will end up with no shares and $20,380 in cash.

That’s a best-case scenario total return of $4,130 / $16,250 = 25.4%

achieved in about 7.5 months on shares that only needed to rise by 2.3%.


What’s the risk?


If ConAgra shares finish below $20 on March 19, 2010:

 The $20 calls will expire worthless.

 The $20 puts will be exercised.

 You will be forced to buy another 1000 CAG shares.

 You will need to lay out an additional $20,000 in cash.

 You will likely have received $380 in dividends.

 You will have no further option obligations.

 You will end up with 2000 CAG shares and $380 in cash.

What’s the break-even on the whole trade?

On the first 1000 shares it’s the $19.55 purchase price less

the $1.30 /share call premium = $18.25 /share.

On the ‘put’ shares it’s the $20 strike price less

the $2.00 /share put premium = $18.00 /share.

Your break-even is thus $18.125 /share (excluding dividends)

and $17.935 /share (including yield).

ConAgra shares could fall by as much as 8.2% without causing

a loss on this trade.


Disclosure: Author is long CAG shares and short CAG options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr. Paul Price's Website


Rating: 2.5/5 (11 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
UPDATE 1-ConAgra raises dividend after raising forecast

CHICAGO, Sept 25 (Reuters) - ConAgra Foods Inc (CAG.N) raised its quarterly dividend by 5 percent on Friday, days after the food maker raised its earnings forecast.

The maker of Banquet frozen meals and Hebrew National hot dogs cited its strong earnings outlook and healthy annual cash flows. ConAgra raised its full-year earnings forecast on Tuesday, when it posted a better-than-expected quarterly profit.

The initial quarterly payout of 20 cents per share, up from 19 cents, will be paid on Dec. 1 to holders of record as of Oct. 30

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