ConAgra Review: Reasons for Concern

Dec.17.10 | About: ConAgra Foods, (CAG)

ConAgra (NYSE:CAG) is a diversified player in the packaged-food industry. Its portfolio includes many well-known brands sold in groceries. ConAgra also sells to restaurants and food service establishments and is the largest supplier of french fries in the U.S. and Asia Pacific food service channels.

I added CAG to my investment idea list after a review of stocks mentioned in Morningstar's (NASDAQ:MORN) dividend newsletter. Over the last month, CAG has been trading between $22-$23.

1. Business Performance Risk (-) and intrinsic stock returns (-)

Metric

Status

FCF / Sales

FCF / Sales has been varying quite a bit over the last 10 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 five years of -3.7%. I am not sure what has been driving this trend, as 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 five 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 five years, CAG has bought back about 15% of its shares

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I am disappointed in Conagra’s business performance. I was expecting CAG to have somewhat of a moat, but its low FCF/sales and return metrics seem to indicate that the business is not able to efficiently weather competition and market conditions, with years of negative FCF and overall declining sales.

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 (+)

Metric

Status

LT Debt / Equity

While CAG 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 since before 2008.

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CAG’s balance sheet appears to be reasonably conservative and should not represent a major risk for an investor in the company.

3. Valuation Risk (+)

Metric

Status

Cash Return

6.7%.

Price to Earnings Ratio

CAG's P/E is currently at 13.5x, lower than the S&P 500 and the stock's five-year average of 17.2x.

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Current valuation levels appear reasonable and could even leave an investor with an appropriate margin of safety, with both earnings and cash valuation being at less than 15x.

Conclusion

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, as well as 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?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.