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Lower commodity prices should benefit ConAgra's bottom line

|Includes:ConAgra Brands, Inc. (CAG)

Tim Biggam, TradingBlock  (September 23, 2011, 10:20am CDT)

Symbol Analyst Target Price Target Date
CAG 26.00 March 1, 2012
Click to enlarge

ConAgra Foods, Inc. (ticker: CAG) is organized into two businesses: Consumer Foods and Commercial Products. The Consumer Foods reporting segment includes branded and private label food products which are sold in various retail and foodservice channels, mainly in North America. The products include a variety of categories (meals, entrées, condiments, sides, snacks, and desserts) across frozen, refrigerated, and shelf-stable temperature classes. The Commercial Foods reporting segment includes commercially branded foods and ingredients, which are sold mainly to foodservice, food manufacturing, and industrial customers. The food industry is highly competitive, and the Company’s facilities and products are subject to many laws and regulations regarding its operations.

While the recent bloodbath in the commodity space has been difficult to watch, it has provided benefits to the end-users of these commodities. One of the biggest benefactors has been ConAgra. The most recent earnings report highlighted the earnings drag that higher input costs, especially wheat, had on the bottom line.

With the recent drop in commodities generally, and wheat in particular, CAG should see a benefit of a lower commodity price regime going forward, which would be a direct benefit to earnings. The stock was one of the few up yesterday (9/22/2011), which was down roughly 3% for equities. With CAG taking its 5.17 billion dollar offer for Ralcorp off the table, both Fitch and S&P removed them from their credit watches, keeping CAG at investment grade.

Technically, the stock held support at the 22.50 level, even with the overall market heading sharply lower. A 4% dividend, a relative value compared to the 10- and 30-year Treasuries yields of 1.7% and 3% respectively, should further provide a floor for the stock.

I look for CAG to move towards the 26 level by March of next year.

Play of the Day

Based on ConAgra's (ticker: CAG) current market price of $23.35 and using a target price of $26.00, a target date of March 1, 2012 and $1,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date.

Click on the strategy name below to access trade details using TradeBuilder on TradingBlock.com. Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Buy Mar Call Spread +96% 51%
Sell Mar Put Spread +72% 55%
Buy Mar Call +61% 47%
Buy Stock +11% 58%
Click to enlarge

* Subject to change due to changing market conditions.

DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services.
 

Stocks: CAG