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Bear of The Day: ConAgra Foods (CAG)

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ConAgra Foods (CAG - Free Report) , Zacks Rank #5 (Strong Sell), is a banded and value added food company.  Its product lines include Hunts, Chef Boyardee, Orville Redenbacher’s and Swiss Miss.  Although it has a well-known product line, the company has disappointed investors with results.  ConAgra posted a 7.5% negative earnings surprise after releasing profits on September 19.  It posted earnings of $0.37/share against a Zacks Consensus Estimate of $0.40/share.  It has recorded a negative surprise two out of the past three quarters.

Earnings estimates are falling:

In its most recent earnings release, the company noted that food volumes were below plan due to category and customer challenges.   Although ConAgra is working to address disappointing execution via merchandising and promotion, analysts were quick to cut profit estimates.

The Zacks Consensus Earnings per Share Estimates for fiscal year 2014 and fiscal year 2015 have each been reduced 10 times over the past 30 days.  2014 EPS projections were cut $0.10 to $2.32, while 2015 EPS were dropped $0.12 in the past 30 days.

The price and EPS Consensus chart shows earnings estimates rolling over and the adverse impact on price.

Valuation reflects caution:

ConAgra is priced at 12.6 times forward earnings per share against a 10 year median of 14.4 and 15.4 for its peer group.  Likewise, its PEG ratio is 1.21 compared to a 10 year median of 1.68 and 2.06 for its peer group.  Investors seem uneasy about the company’s ability to improve profit growth and seem to be taking a “show me” view with discounted valuation.

Free cash flow has been positive at ConAgra, but choppy in recent years.  Free cash flow was $1.078 bln in fiscal year 2010, but has been lower each of the past three fiscal years and stood at $972 mln in fiscal year 2013.

The plus for the company may rest in its dividend yield of 3.29% and a projected payout ratio of 48% for fiscal year 2014.  The dividend yield is competitive relative to the 10 year treasury yield and the payout ratio should support the dividend.


Those looking for an investment in the consumer staples space with an emphasis on food may think about Pinnacle Foods (PF), Zacks Rank #1 (Strong Buy) as an alternative.   Pinnacle also has a portfolio of well-known consumer brands including Birds Eye, Duncan Hines, and Mrs. Paul’s.  In contrast to ConAgra, it is seeing strong upward momentum in earnings per share estimate revisions. It also has an attractive PEG ratio at 1.2 and pays a dividend of 2.75%.

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