Over the last six months, Conagra’s shares have sunk to $25.99, producing a disappointing 20% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Conagra, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Even with the cheaper entry price, we're swiping left on Conagra for now. Here are three reasons why CAG doesn't excite us and a stock we'd rather own.
Why Do We Think Conagra Will Underperform?
Founded in 1919 as Nebraska Consolidated Mills in Omaha, Nebraska, Conagra Brands today (NYSE: CAG) boasts a diverse portfolio of packaged foods brands that includes everything from whipped cream to jarred pickles to frozen meals.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
Conagra’s average quarterly sales volumes have shrunk by 2% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Conagra’s revenue to drop by 1.4%, a decrease from its 2.1% annualized growth for the past three years. This projection doesn't excite us and implies its products will face some demand challenges.
3. Shrinking Operating Margin
Operating margin is a key profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.
Looking at the trend in its profitability, Conagra’s operating margin decreased by 6.2 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 6%.
Final Judgment
We see the value of companies helping consumers, but in the case of Conagra, we’re out. Following the recent decline, the stock trades at 9.8× forward price-to-earnings (or $25.99 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. Let us point you toward the most dominant software business in the world.
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