Today’s Investment Observation is on ConAgra (CAG). According to Yahoo Finance,
ConAgra Foods, Inc. operates as a food company in North America and internationally. It operates in two segments, Consumer Foods and Commercial Foods. The Consumer Foods segment provides branded, private label and customized food products, which are sold in various retail and food service channels. The Commercial Foods segment provides commercially branded foods and ingredients principally to food service, food manufacturing and industrial customers.
After a cut in 2006, ConAgra has had a steady, albeit irregular, increase of its dividend. Prior to 2006, ConAgra had a 28-year history of consecutive dividend increases, according to Mergent’s Handbook of Dividend Achievers. As recently as Sept. 21, 2010, ConAgra announced a 15% increase of its dividend from the previous year.
In our analysis of ConAgra, we’ll first address the technical pattern of Edson Gould’s Altimeter. The altimeter suggests to us that ConAgra is reasonably undervalued in relation to its dividend. The green horizontal line in the chart below is the indicated level where ConAgra would normally be considered undervalued at $21.40 per share. On the opposite end at the overvalued range, ConAgra would trade at approximately $29.72 as indicated by the red horizontal line. The extremes of the under and over valuation are indicated in green and red text, respectively. We adjusted the altimeter to reflect the cut in dividend of 2006. This means that the percentage decrease of the dividend was applied to periods before 2006 to obtain a representative perspective on the altimeter.
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According to a Value Line Investment Survey dated Oct. 29, 2010, ConAgra is expected be around the $40 range by 2014. We opted to err on the side of caution on this matter and have taken the view that, from the current price of $21.48, we could reasonably expect that ConAgra could rise to $30, or 39.7%, during the next 3 to 4 years. However, our investment strategy requires that if we get a 10% gain in less than a year in a tax-deferred account then we’ll consider the next best investment alternative if we can identify one at that time.
Value Line also indicated that ConAgra is fairly valued at 12 times cash flow. Using the full year cash flow figure for 2010, ConAgra should return to a fair value of $30. Again, this is far above the current price by 39.7% and in perfect alignment with Gould’s Altimeter; which shows that ConAgra’s range established since 1999 is still intact.
Dow Theory ascribes a fair value for ConAgra of $20.04 based on the peak of March 23, 2010 and the trough on Dec. 4, 2008. The Dow Theory downside targets from the current level are:
- $20.04
- $17.96
- $13.80
The downside risk, in our opinion, is 36% below the current price of $21.48. We believe that anyone considering ConAgra should carefully assess their willingness to accept such downside risk.
In a recent posting (link here), we submitted that for the “buy-and-hold” investor a company like ConAgra would outperform, in the long run, the performance of gold and silver companies like Newmont Mining (NEM) and Coeur D’Alene (CDE); later changed to Hecla Mining (HL), for its continuous price history through the 1970s. We intentionally used the period of the gold and silver bull market to compare ConAgra to the stocks mentioned. We included the silver stocks because we have frequently written that in the past, as is the case presently, silver outperforms gold.
Critics argued that Coeur D’Alene wasn’t exactly the best-run company around. Others said that the timeframe of 1970 to 1983 was biased against precious metal stocks since the peak in gold and silver was in 1980. To answer these critics, we only used Newmont Mining at its lowest price in the period, from 1970 to 1980, which occurred on Dec. 13, 1974. We then compared the performance of ConAgra to Newmont until Nov. 21, 1980. The chart below, courtesy of Morningstar.com, is even more astounding than the one initially created. As the chart below demonstrates, instead of outperforming Newmont by 7x, ConAgra beat Newmont by almost 17x.
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The last critic standing on our comparison of Newmont Mining, Coeur D’Alene, Hecla and ConAgra said that comparing companies from 1970 to 1983 has no relevance to the current environment. We’re hoping that such a perspective is correct and guessing that any critic making such a remark believes that inflation and interest rates will not be heading higher anytime soon.
Disclosure: Long CAG.
