CAG looks like a smart value play

December 4, 2018

CAG looks like a smart value play

Monday started the week off with a bang, as the Trump administration announced that it had reached an agreement with China to put a temporary pause on the imposition of any new tariffs. The market cheered the news, hopeful that this will be a positive step that creates constructive discussion toward a long-term compromise that works for both countries. That could give the market a pretty good lift in the short-term, but it doesn’t mean that it’s time to jump back into market with both feet yet. I think it’s still smart to be cautious.

First, it’s been interesting to see that China hasn’t confirmed the agreement. Does that mean that it could change? That’s hard to say for sure; but I think it does reflect the fragile state of trade relations between the two largest economies in the world. Keep in mind, too that there are still concerns about interest rates that have yet to be resolved, even as Fed Chair Jerome Powell seemed to moderate his rhetoric recently about the pace and degree of future rate increases.

Food stocks are a place that I’ve been finding a lot of good value-oriented opportunities for quite a few months now. Many of the stock that I’ve focused on have provided a pretty nice “safe haven” of relatively stable prices even in the face of a lot of broad market and economic volatility and uncertainty. Conagra Brands (CAG) is one of the largest packaged food companies in the U.S., with well-known brands that are probably sitting on your pantry, refrigerator and freezer shelves right now like Orville Redenbacher, Healthy Choice, Hunts, Hebrew National, and much more. The stock has underperformed versus a lot of other stocks in its industry, and is down about 17.8% from its 52-week higher around $39.50 in June of this year. That decline is offering up an interesting opportunity to work with another fundamentally very solid company at a nice price.

Fundamental and Value Profile

Conagra Brands, Inc., formerly ConAgra Foods, Inc., operates as a packaged food company. The Company operates through two segments: Consumer Foods and Commercial Foods. The Company sells branded and customized food products, as well as commercially branded foods. It also supplies vegetable, spice and grain products to a range of restaurants, foodservice operators and commercial customers. Conagra Foodservice offers products to restaurants, retailers, commercial customers and other foodservice suppliers. The Company also operates in the countries outside the United States, such as Canada and Mexico. The Company’s brands include Marie Callender’s, Healthy Choice, Slim Jim, Hebrew National, Orville Redenbacher’s, Peter Pan, Reddi-wip, PAM, Snack Pack, Banquet, Chef Boyardee, Egg Beaters, Rosarita, Fleischmann’s and Hunt’s. The Company sells its products in grocery, convenience, mass merchandise and club stores.CAG’s current market cap is $12.7 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings and sales have been mostly flat, with earnings increasing only 2.17%, and sales growing slightly less at 1.67%. I believe this is a reflection, however of the mature state of the company’s primary markets, the United States and Western Europe. The company’s margin profile is a sign of strength, since Net Income is right around 10% of Revenues over the past year as well as the most recent quarter.
  • Free Cash Flow: CAG’s free cash flow is modest, but adequate at $632 million. That translates to a Free Cash Flow Yield of about 5.04%.
  • Debt to Equity: CAG has a debt/equity ratio of .85. This number appears conservative, but taken alone could hide one fundamental problem that is a red flag. The company doesn’t have great liquidity, with cash and liquid assets of only $74.8 million versus $3.2 billion in long-term debt. Their balance sheet shows that operating profits are sufficient to service the debt they have, and they don’t appear to be in any danger in that regard; however this is an area that is worth paying attention to.
  • Dividend: CAG pays an annual dividend of $.85 per share, which translates to an annual yield that of about 2.6%.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CAG is $9.71, and which translates to a Price/Book ratio of 3.32 at the stock’s current price. Their historical average Price/Book ratio is 4.66, which means the stock is current sitting almost 29% below a long-term target price at around $45 per share. Their Price/Cash Flow ratio is more conservative, but still attractive since it offers a discount just a little below 20% its historical average. Either way, you’re looking at a long-term target range between about $39 and $45 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.


  • Current Price Action/Trends and Pivots: The largest portion of CAG’s decline has come since late October, when the stock hit a pivot high around $37 per share before dropping to its current level. It seems to have found a stabilization level in the last week at around $32 per share, with immediate resistance at around $34. A reversal of the stock’s downward trend would be marked by a break above $35, to about $36, based on the pivot lows in February, March, and late July of this year. If the stock breaks its current support, it could see continued downside risk into the $29 range.
  • Near-term Keys: A short-term bullish stance is pretty speculative right given the strength of the stock’s slide over the past six weeks; however a break above $34, or even better, $35 could offer a good opportunity to work with call options or trade the stock outright on a short-term basis, with a target price at around $39 per share. A drop below $32 could also be used as an opportunity to short the stock or to buy put options, with a short-term target in the $29 range. The best opportunity with CAG, in my opinion is with the long-term value proposition.