ConAgra Foods — How to Play Tuesday’s Earnings

by Jamie Dlugosch | September 19, 2011 8:52 am

On Tuesday before the market opens, ConAgra Foods (NYSE:CAG[1]) reports earnings for the quarter ending Aug. 31, 2011. The processed and package goods food company has lost 9% of its value since the middle of July. What should be viewed as a defensive play has fallen with the rest of the market.

Food companies might not be sexy from a growth perspective, but they deliver stable and consistent profits irrespective of economic conditions. We all have to eat, and as such, food stocks should be something investors can count on even when other stocks are falling.

The recent selling in ConAgra might create an opportunity for traders in advance of its earnings report Tuesday. On Friday, Diamond Foods (NASDAQ:DMND[2]) gained nearly 12% after that company reported strong earnings results.

During the past year, ConAgra has had mixed results from an operating perspective:

In the most recent quarter ending May 31, the company missed analyst estimates by a penny per share. Higher commodity prices negatively impacted results in that period. With input prices falling[3] in the current period, ConAgra should have an easier time beating expectations.

The average Wall Street estimate is calling for ConAgra to make 31 cents per share this quarter. Ninety days ago, the estimate was at 36 cents per share. For the current year ending May 31, 2012, the company is expected to make $1.81 per share. That number increases by 9% in the following year to $1.98 per share. At current prices, ConAgra trades for 13 times current-year earnings.

Despite being down since mid-July, Conagra shares still are up 9% during the past 12 months:

ConAgra’s attempt to purchase Ralcorp (NYSE:RAH[4]) is at a crossroads. The company gave Ralcorp a deadline of 5 p.m. Monday to start discussions about a takeover, with no contact made as of this writing. The uncertainly might be one of the reasons this defensive stock has traded lower with the rest of the market.

Shares of ConAgra do trade for a premium to its expected profit growth rate. That premium makes it unlikely that the stock will gain significantly when it reports earnings Tuesday. There is nothing in past performance to suggest the company is headed for a substantial earnings beat.

That mixed performance combined with valuation might have the opposite effect should the company miss expectations. And the risk without the potential for reward suggests to me that traders stay on the sidelines with this one when it reports results Tuesday.

Other companies reporting results this week include: AutoZone (NYSE:AZO[5]), General Mills (NYSE:GIS[6]), Bed, Bath & Beyond (NASDAQ:BBBY[7]), CarMax (NYSE:KMX[8]) and Carnival Corp. (NYSE:CVL[9]).

  1. CAG:
  2. DMND:
  3. input prices falling:
  4. RAH:
  5. AZO:
  6. GIS:
  7. BBBY:
  8. KMX:
  9. CVL:

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