Conagra Brands Inc (NYSE:CAG) continues marching higher. The Chicago-based producer of brands such as Hunt’s, Healthy Choice and Slim Jim beat estimates. It also outlined a strategic direction for the company that reflects changing consumer tastes. However, Conagra stock initially fell in trading, despite this good news. Although the company should see strong profit growth as it works to revamp some of its brands, now may not be the time to buy Conagra stock.
Conagra Stock Beat Estimates
For the third quarter of fiscal year 2018, the company earned 61 cents per share. Wall Street had expected 56 cents per share. This also comes in well ahead of Q3 2017 earnings of 41 cents per share.
The year-over-year revenue increase was more modest, rising only 0.5%. Also, the $1.99 billion in revenue missed estimates by 10 million. Modest growth helped revenues in its refrigerated and frozen segment. Still, CAG saw its biggest growth in its international segment, where quarterly growth rose 8.9% year-over-year. International makes up about 10% of company sales. Both Grocery and Snacks and its Foodservice segment saw the largest revenue declines. The company exiting many non-core and low-margin businesses is responsible for this revenue drop.
Despite the good earnings news, Conagra stock price fell after the announcement. While it has experienced some recovery, the equity trades near its level before the company released its earnings report.
The company is working to modernize many of its outdated brands. Venerable products such as Banquet frozen dinners and Hebrew National hot dogs are being revamped to reflect changing tastes. Today’s consumers want fresher ingredients and simple recipes. It’s believed this trend has negatively affected other CAG packaged brands such as Chef Boyardee and Rotel.
However, CAG and peers such as General Mills, Inc. (NYSE:GIS), Kraft Heinz Co (NYSE:KHC), Kellogg Company (NYSE:K), and Campbell Soup Co (NYSE:CPB) face challenges such as higher food costs and a shortage in trucking capacity. For this reason, CAG and its peers seem intent on raising prices.
Conagra Stock Appears Overvalued
How the market will receive these higher prices remains unknown. However, despite this possibility, profit estimates have risen for the company. After struggling with profits a few years ago, Conagra stock looks poised for more profit growth. Analysts predict $2.04 per share in income for the current fiscal year. They also expect profits to grow by just under 10% in the next two years. Among its peers, only General Mills is expected to reach this level of profit growth.
Unfortunately for new buyers, the price to Conagra stock seems to reflect the strong performance. The stock currently trades at a 21 price-to-earnings (PE) ratio. In comparison, the PE of GIS stock stands at just under 12. Since one can pay close to half-price for the same growth rates in General Mills, I would have to recommend GIS over CAG stock.
Final Thoughts on Conagra Stock
Even though Conagra’s moves to revamp the company will benefit profits, I feel now is not the time to buy Conagra stock. Conagra stock beat estimates and announced plans to overhaul some of its brands. Still, investors ignored the good news. As of now, the stock trades near pre-announcement levels.
Along with rising input costs, valuation could also explain the market’s tepid reaction. A 21 PE ratio remains high for its industry, and investors might find more value in some of its peers. Still, regarding strategic direction, I like the plans to address pricing challenges and to revamp brands to reflect current consumer tastes. I also like the company’s international moves, as sales outside the U.S. will likely drive most of the company’s long-term growth.
I believe Conagra will endure as one of the best companies in the industry. However, 21 PE remains as a high valuation for a food manufacturing company. For this reason, investors are more likely to find higher profits by looking to Conagra’s peers.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
