Monday, August 4, 2014

Time to Buy ConAgra?

ConAgra Foods  shareholders have had a hard time stomaching its earnings and outlook statements in the last couple of years. The company has disappointed across all of its segments, and its acquisition of Ralcorp has been fraught with unexpected difficulties. With that said, the stock now stands at a valuation discount to peers like Treehouse Foods and Kraft Foods  , but does this make it the value play in the sector? It's time to look more closely.

ConAgra Foods in charts
Sometimes a chart tells you a lot of what you need to know about a stock. For example, ConAgra's price chart reveals that after every disappointing earnings report, the value hunters move in on the expectation that it will sort out its difficulties in due course.

CAG Chart

CAG data by YCharts.

Unfortunately, the latest setback has taken the stock price almost back to where it was in February when it last guided expectations lower. However, don't be surprised if the value players and activist investors start sniffing around the stock, because on a relative value basis, the stock is starting to look cheap.

ConAgra's acquisition of private-label food company Ralcorp is intended to enable the company to sell both branded and private-label foods into its customer base. The idea is that ConAgra can generate synergies in the process and take advantage of offering a range of products to the same retailers. With this in mind, Fools should keep an eye on its valuation versus Kraft (branded foods) and Treehouse Foods (primarily a private-label company).

Enterprise value (market cap plus debt) to free cash flow is used, because ConAgra took a $681 million non-cash impairment charge in the recent fourth quarter, which reduced its net income for the full year to just $315 million. In addition, ConAgra, Treehouse, and Kraft all contain significant, but varying, amounts of debt.

CAG EV to Free Cash Flow (TTM) Chart

There is no doubt that ConAgra looks like a good relative value, but is it?


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