Conagra (CAG) is a Zacks Rank #1 (Strong Buy) that is a leading branded food company. It specializes in the production, distribution, and marketing of a wide range of packaged food products, with a diverse portfolio of well-known brands.
The stock experienced selling for most of the year, which has the stock down about 9% on the year. Investors just have not been excited about the short-term growth prospects with higher costs issues as a major headwind. And when you look at the chart, we see sideways action for the last three years.
But longer-term investors might be starting to find some value in a company that continues to beat earnings and pays a healthy dividend.
About the Company
Conagra was founded in 1919 and is headquartered in Chicago, IL. The company employs over 18,000 and has a market cap of $17 billion. The stock has a Forward PE of 13 and pays a dividend of 3.7%.
Conagra operates in various categories including frozen meals, snacks, condiments, sauces, soups, desserts, and more.Some iconic brands of the company are Reddi-Wip, Hunt’s, Healthy Choice, Frontera, Slim Jim, Blake’s, and Marie Callender.
The stock has a Zacks Style Score of “C” in Value and Growth, but “F” in momentum.
Value and Risks
As the stock has come in this year, the value prospects for the stock have become greater. The PE of 13, is below other packaged peers, which averages around 19. With a nice dividend just under the 4% area, any further drop in the stock price should see buyers come in based on valuation.
The main risk for the stock is a lack of growth combined with higher commodity prices. However, this is priced into the stock and the recent and continued drop in commodity prices could start to become a tailwind for the company in the back half of the year.
Q3 Earnings Beat
In early April, the company reported an earnings beat of 19%. This was the fifth straight EPS beat and the ninth beat out of the last ten quarters.
Digging into the third quarter, the company reported EPS of $0.76 v the $0.64 expected. Revenues came in at $3.09B, which was as expected.
Conagra raised its FY23 EPS to $2.70-2.75 and narrowed its organic revenue to +7-7.5%. The FY23 operating margins midpoint was raised as productivity and service level improvement helped operating margins recover.
Year over year Grocery and Snacks were up 3.7%, the Refrigerated & Frozen Segment was up 5.6% and international sales were up 9.5%.
Organic sales were up 6.1%, which was driven by a 15.1% improvement in price/mix. Although, this was offset by a 9% decrease in volume. Even so, the higher prices have had less impact than they have historically.
The company has successfully navigated higher input costs by raising prices. Margins are recovering and this is helping longer-term earnings estimates tick higher.
The stock meandered after earnings and recently took a leg lower. Now CAG is trading close to 2023 lows after a mostly positive earnings report.
The reasoning behind the bearishness is the focus on growth rather than value. Additionally, short-term estimates just aren’t that exciting.
For the current quarter, estimates have ticked lower since EPS, moving from $0.64 to $0.61. Analysts still see short-term headwinds with higher costs.
However, the long-term view looks much better. For the current year, estimates have ticked higher since EPS, going from $2.66 to $2.75 or 3%.
Looking at next year, we also see estimates trending the right way. Over the last 60 days, numbers have gone from $2.75 to $2.83, also 3%.
When you look at the chart, CAG has not done much since 2015. Minus the COVID crash, the stock has basically traded sideways with $35 being the consistent level.
As the stock approaches this area, there seems to be a buyable setup for both the short and long-term approaches.
The stock recently broke the 200-day moving average. This a typically a negative, but sometimes when this happens, weak hands are taken out of the market and the stock can bounce rather quickly. For CAG, this scenario last played out in early March. The stock broke the 200-day MA at 35.50, fell under $35, but rallied to $39 in under a month’s time. This was a quick 10% gain for any short-term trader that recognized the opportunity.
While this pattern might not repeat itself, longer-term traders should be starting positions around the $35 area. This has been a stronghold for over half a decade and creates a solid risk/reward scenario. Additionally, investors have a dividend of almost 4% that they can collect while they wait for the company to navigate the current inflationary environment.
Conagra is coming into its long-term support area and considering the earnings momentum, dividend, and value seen in the name, now is the time to start considering the stock.
Short-term investors have a nice setup for a bounce at current levels. Long-term investors should consider this dividend-paying consumer staple name as part of their portfolio.
— Jeremy Mullin
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