ConAgra Foods (CAG) Quarterly Valuation

People can be very picky about their food products, with some having strong brand preference over others.  As a result, some investors inadvertently bring these brand preferences into their investment decisions, but this is a form of speculating that is discouraged among investors following Benjamin Graham’s teachings. Intelligent Investors know to avoid such speculation by basing their analysis on fundamentals and factual data.  Each investment opportunity must be evaluated in order to determine if the company is trading below its intrinsic value.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how ConAgra Foods fares in the ModernGraham valuation model. 

Company Profile (obtained from Google Finance): ConAgra Foods, Inc. is a packaged food company. The Company operates in four segments: Consumer Foods, Commercial Foods, Ralcorp Food Group, and Ralcorp Frozen Bakery Products. Consumers can find recognized brands such as Banquet, Chef Boyarde, Egg Beaters, Healthy Choice, Hebrew National, Hunt’s, Marie Callender’s, Odom’s Tennessee Pride, Orville Redenbacher’s, PAM, Peter Pan, Reddi-wip, Slim Jim, Snack Pack, and many other ConAgra Foods brands and products, along with food sold by ConAgra Foods under private brands, in grocery, convenience, mass merchandise, club stores, and drugstores. In January 2013, it acquired Ralcorp. Ralcorp manufactures private brand products. In September 2013, Brynwood Partners VI L.P. announced that its portfolio company, Lightlife Foods, Inc., had acquired Lightlife, one of ConAgra Foods’ brands with product lines that include vegetarian-based burgers, hotdogs and other meatless frozen and refrigerated items.

CAG data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
6. Moderate PEmg ratio – PEmg is less than 20 – PASS
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
3. Earnings Stability – positive earnings per share for at least 5 years – PASS
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price	$29.36
MG Value	$31.39
MG Opinion	Fairly Valued
Value Based on 3% Growth	$26.32
Value Based on 0% Growth	$15.43
Market Implied Growth Rate	3.84%
NCAV	-$25.12
PEmg	16.17
Current Ratio	1.28
PB Ratio	2.26

Balance Sheet – 11/24/2013

Current Assets	$4,755,600,000
Current Liabilities	$3,729,500,000
Total Debt	$8,771,100,000
Total Assets	$20,786,400,000
Intangible Assets	$11,811,800,000
Total Liabilities	$15,314,200,000
Outstanding Shares	420,410,000

Earnings Per Share

2014 (estimate)	$2.20
2013	$1.85
2012	$1.12
2011	$1.90
2010	$1.67
2009	$1.42
2008	$1.06
2007	$1.35
2006	$1.15
2005	$1.27
2004	$1.50

Earnings Per Share – ModernGraham 

2014 (estimate)	$1.82
2013	$1.61
2012	$1.47
2011	$1.59
2010	$1.40
2009	$1.26

Dividend History

CAG Dividend data by YCharts

Conclusion:

ConAgra Foods is suitable for either the Defensive Investor or the Enterprising Investor.  The company passes all of the requirements of the Defensive Investor except the current ratio requirement, and the company is therefore also suitable for the Enterprising Investor despite having a debt level relative to current assets that the Enterprising Investor normally wouldn’t permit.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.  Such research should include a review of ModernGraham Stocks & Screens.  From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $1.26 in 2009 to an estimated $1.82 for 2014.  This level of growth is good, not great, and supports the market’s current implied estimate for growth of 3.84%.  The ModernGraham valuation model returns an intrinsic value that is within the margin of safety when compared to the market price, leading to a conclusion that the company is fairly valued.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on ConAgra Foods (CAG)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in ConAgra Foods (CAG) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.