Were the Algo's Sleeping?? - Conagra - CAG
Do algorithms ever sleep?
On Thursday morning Conagra Brands reported a poor 4th quarter (their fiscal year ends May 30), and guided fiscal 2025 lower to a range of $2.60-$2.65. Rather than crash 15-20%, as almost always happens when a poor quarter is reported, CAG went down less than 10%, and finished the day almost unchanged. That got my attention.
Maybe nobody cares any more about CAG. Despite a fairly decent record of slow growth and deleveraging, the stock sells for 11x that 2025 estimate. All you yield whores already know CAG sports almost a 5% yield. Wall Street has 2 buys, and an amazing 14 hold/sells. It is hard to imagine expectations getting any lower. None of my value investing friends own CAG. The company has no plans to buyback its own stock.
CAG is so boring it is almost a bond. With a high dividend payout, it is hard to see earnings ever growing more than 3-4%. Maybe the P/E ratio could expand, but why?
CAG has some above average businesses in frozen entrees and snacks. They try to tell you that in these key categories, 80% of their brands are holding or gaining market share. CAG will also remind you that frozen entrees have had a 40 year compound growth rate of 4%, better than any food category. CAG also has some underperforming segments like canned vegetables and pasta, that are a drag on the good businesses. Unit volume actually turned negative, even in entrees, when food inflation occurred in 2022-23.
Conagra has a long history of making silly acquisitions, but this is a new management team. The new management team seems almost frozen in place. There are no exciting growth plans, and only a small number of new products. These guys are just hanging on, but trying not doing anything stupid. This new team deserves credit for taking leverage down from 5.5x to under 4x EBITDA.
You can make the case the new 2025 estimate is very conservative, and will be easy to beat. Did the algo’s figure this out?
If you just want to “hide under the bed” until the economy and election get sorted out, you could think about owning CAG. Let’ call this a top 50 idea.
Let’s think about the options in packaged food:
Tyson - TSN - $57 - This is by far my favorite. TSN is a very complex story about the consolidation in the meat packing industry. Not for the faint of heart.
Lamb Weston - LW - $ - $79 - Very interesting spinoff from Conagra seven years ago. The french fry business is still growing, but I am hoping for another bad quarter from poor restaurant traffic. Watch very carefully.
J.M. Smuckers - SJM - $113 - Everybody knows the Hostess deal was bad, but at less than 10x SJM deserves another look. Family run, so why did they do Hostess? A riddle to be solved. Looking for one more bad quarter.
McCormick - MKC - $71 - Spice king trades at 25x, but their is great growth story here in sauces. A Jim Cramer promotion at $100, but at $70 he keeps his mouth shut. At some price I might be interested.
Danone - DANOY - $13 - The dairy business is dying, but these guys are decent operators. Not sure the French are shareholder friendly. Crazy, but interesting.
Kellanova - K - $57 - Now trades at 15x without the cereal business. Pop Tarts and Pringles are the top brands. Wall Street has only 3 buys and 15 sells. Difficult to get excited.
WM Kellogg - KLG - The cereal spinoff dipped to $10, ran to $25, and is now back at $15. Deserves more investigation.
Kraft Heinz, Campbells, Hershey, Hormel, and General Mills are all big companies that are hard to change. A quick glance at each showed little of interest.