Over the past six months, Conagra’s shares (currently trading at $16.16) have posted a disappointing 16.1% loss, well below the S&P 500’s 11.7% gain. This was partly driven by its softer quarterly results and 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? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Conagra Will Underperform?
Despite the more favorable entry price, we’re passing on Conagra for now. Here are three reasons you should be careful with CAG, plus one stock we’d rather own.
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 1.5% 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 3.9%. This projection doesn’t excite us and suggests its newer products will not accelerate its top-line performance yet.
3. Shrinking Operating Margin
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
Analyzing the trend in its profitability, Conagra’s operating margin decreased by 26.2 percentage points over the last year. Conagra’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 14.4%.
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 11.3× forward P/E (or $16.16 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
Stocks We Like More Than Conagra
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