Providing the Right Antidote to our ConAgra Recommendation

Dec.24.10 | About: ConAgra Foods, (CAG)

We love corporate news that is bad. There are few times when anything can be learned through good news, at least not as much as what can be learned with “bad” news.

Recently, there was an article titled “Nothing Appetizing About ConAgra” published on Investopedia.com that was unrelenting in the bad news regarding the future prospects of our recent Investment Observation on the same company. So thorough, and yet concise, was the article that we feel it is a must read.

Along with all the negative prospects for ConAgra (NYSE:CAG), there was one morsel of information which happens to confirm our view of what ConAgra might be worth. In the sixth paragraph of the article, it says the following:

Assuming that private equity buyers could wring some efficiencies and cost savings from this business, a deal worth $28 to $30 could be achievable

In our Investment Observation of ConAgra dated December 1, 2010, we indicated that using several different approaches, we were able to arrive at a “fair value” of $30. All things cannot go our way with our investment recommendations, so if we were to assume the stock to rise at least to the midpoint between the current price of $22.40 and the expected fair value of $30, then we’d get a gain of 17%. Despite having opposite views on the prospects for the company, there is common ground as to the possible valuation of the company.

We’re reticent to believe that taking the company private, which will then lead to taking the company public at some point down the road, will truly cure what ails ConAgra. In fact, the history of private equity, from one man's perspective, has been abysmal for companies ensnared in such transactions. The recent book by Josh Kosman titled The Buyout of America details the history of such deals and the subsequent impact on the respective company and their employees.

As we’ve shown in the example of Wilmington Trust (NYSE:WL), market analyst estimates, including our own, can be usurped by realities beyond our purview. Therefore, despite our take on the prospects for this company, we still recommend “Nothing Appetizing About ConAgra.” It provides the right antidote to our recommendation to consider ConAgra as a possible investment candidate.

Disclosure: I am long CAG.