Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  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 or by reviewing 5 Undervalued Companies for the Enterprising Investor. 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 (CAG) 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.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $31.47 |
| MG Value | $31.57 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $26.37 |
| Value Based on 0% Growth | $15.46 |
| Market Implied Growth Rate | 4.40% |
| NCAV | -$24.42 |
| PEmg | 17.30 |
| Current Ratio | 1.40 |
| PB Ratio | 2.36 |
Balance Sheet – 2/23/2014
| Current Assets | $4,520,600,000 |
| Current Liabilities | $3,240,500,000 |
| Total Debt | $8,760,700,000 |
| Total Assets | $20,433,300,000 |
| Intangible Assets | $11,735,400,000 |
| Total Liabilities | $14,806,700,000 |
| Outstanding Shares | 421,150,000 |
Earnings Per Share
| 2014 (estimate) | $2.21 |
| 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 both Defensive Investors and Enterprising Investors.  The company passes all of the Defensive Investor’s requirements except the current ratio, and even though the Enterprising Investor is concerned with the high level of debt relative to current assets, the company qualifies for both investor types because it is suitable for Defensive Investors.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.40 in 2010 to an estimated $1.82 in 2014.  This level of demonstrated growth, while rather low, is supportive of the market’s implied estimate of 4.4% earnings growth and leads the ModernGraham to calculate an estimate of intrinsic value that falls within a margin of safety relative to the price.
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 Inc. (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: Â The author did not hold a position in ConAgra Foods Inc. (CAG) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.
Leave a Reply