Welcome to the Stock of the Day!
Before the opening bell today, ConAgra (CAG) shares popped 5% after it reported surprisingly strong second-quarter results. Does this signal a turnaround for ConAgra, which has struggled in the increasingly competitive food industry?
Find out in today’s Stock of the Day.
ConAgra Foods’ claim to fame is that its products are found in 97% American households. This isn’t surprising, considering that this company produces everything from Hunt’s ketchup to Orville Redenbacher’s popcorn to PAM cooking spray.
A $15.5 billion business that employs 34,800 worldwide, ConAgra is the fourth largest player in the Processed & Packaged Goods industry. In early 2013, ConAgra completed its buyout of Ralcorp Holdings Inc., making the combined company one of the largest packaged food players on the continent. As I’ll discuss shortly, the acquisition will impact ConAgra’s future earnings.
ConAgra posted better than expected second-quarter earnings before the opening bell today. Compared with the year ago quarter, net income advanced 18% to $248.7 million, or 58 cents per share. Adjusted earnings weighed in at 62 cents per share, which topped the 55 cents per share consensus estimate by13%.
Over the same period, net sales jumped 27% to $4.71 billion; this also topped the $4.63 billion estimate by a hair. Management also reaffirmed its fiscal 2014 outlook. The company expects adjusted earnings in the range of $2.34 to $2.38 per share, above the $2.33 Street view. The company also expects 10% annual earnings growth in the fiscal 2015 to 2017 period, partially due to synergies generated by the recent Ralcorp acquisition.
As one of the larger packaged foods companies, ConAgra-and ConAgra stock- has some serious competition to contend with—including the likes of Mondelez (MDLZ), the parent company behind Kraft brands. If you plug these two companies into my Portfolio Grader tool, you’ll see MDLZ is more highly rated a C-rated hold. That’s because when you dig in the fundamentals, you see that Mondelez beats ConAgra in terms of operating margin growth, earnings growth, earnings surprises and earnings momentum.
To top it off, MDLZ has stronger buying pressure, indicating a better risk-to-return ratio. This may be in part due to some of the volatility to have hit dividend stocks: CAG yields 3.1% while MDLZ yields just 1.6%.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. For much of the past year, this Conservative stock has remained at a buy. But last September, something interesting happened to this stock: Buying pressure plunged, sending CAG all the way down to a D-rated sell.
Currently, CAG receives a D-rating for its Quantitative Grade. Meanwhile, ConAgra’s fundamentals are somewhat mixed; while the company receives decent marks for sales growth, earnings momentum and return on equity, there’s plenty of room for improvement in terms of earnings growth (D), operating margin growth (D), earnings surprises (F) and cash flow (C). CAG receives a C for its overall fundamentals.
Bottom Line: As of this posting, I rate CAG a D-rated Sell. Because it will take the company some time to realize the benefits of the Ralcorp buyout, current shareholders should take this as an opportunity to sell on a bounce.
Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!