2 weeks Ago
sfe-co2/iStock via Getty Images Investment Thesis Conagra Brands ( NYSE: CAG ) is a holding company that deals with the production and packaging of various food products. The company is investing heavily to strengthen its product portfolio. In fact, on August 9th, Conagra Brands expanded its portfolio by acquiring Sweetwood Smoke & Co.
, the maker of the premium FATTY Smoked Meat Sticks brand. In addition to this, Conagra Brands has announced several new product launches to be made during the summer of 2024, and this makes this company very attractive for the foreseeable future. Conagra Brands also pays attractive dividends .
It has a dividend yield of 4.51% and a double-digit dividend growth over the last 5 years of 10.49%.
After evaluating the company, I came to the conclusion that there is value and therefore my advice is to BUY. Company's last results overview Looking at the latest 10-K filed by the company on July 11, 2024, we can see that there was a slight decrease in net sales, mainly caused by inflation. In fact, in fiscal year 2023, net sales were $12,277.
0 million while in fiscal year 2024, net sales amounted to $12,050.9 million, thus decreasing by 1.8%.
However, if we look in more detail at the net sales divided by category, we can get more information and some positive considerations: Net Sales (Company's 10-K) Pie chart (Company's 10-K) We can see that the Grocery & Snacks and Refrigerated & Frozen categories are the ones that generate the most sales for the company. Grocery & Snacks recorded a decrease of only 0.5% despite inflation, while Refrigerated & Frozen decreased by 5.
6%, and considering that it represents about 40% of net sales, it creates some concerns. The international category recorded an increase of 7.6%, and it should be considered that the international category also includes frozen and refrigerated products that are exported abroad.
For this reason, I believe that the decrease in Refrigerated & Frozen is not due to the fact that the products are not liked, but rather due to the price and the strong competition in the sector. The increase in the international sales sector could allow the company to acquire new customers abroad to increase sales volume, and I believe that there is still a lot of room for improvement since the international sector still has little impact on total sales. A positive factor to consider is the data on operating profit by category.
In fact, the category Refrigerated & Frozen, although very influential in net sales, does not generate a very high operating profit. In fact, the majority of the operating profit is made by the category Grocery & Snacks: Operating Profit (Company's 10-K) Portfolio Expansion and New Products The most important challenge that a company operating in the food sector faces is to create the best portfolio of products to meet the tastes of its customers. In this regard, Conagra Brands seems to me to be very good at managing its products and brands.
On August 9, 2024, the company announced the acquisition of Sweetwood Smoke & Co., which produces a protein snack called FATTY Smoked Meat Sticks. Fatty (Company's website) This is an interesting product in my opinion because it is not positioned at the same level as sweet snacks, but rather falls into the category of healthy/protein snacks.
But the most interesting news is the one released on June 26, 2024, where the company states the launch of over 50 new products during the summer of 2024. The new products will cover multiple categories, although the main focus will be on the Refrigerated & Frozen category. In my opinion, this is a move that could add some pep to the company’s sales, especially in categories that have shown a slowdown in the last year.
If the products are successful, they could bring a nice boost in sales due to the novelty effect in the coming period. You can find more details about the new products on the company’s official website . Dividend analysis In this section, I want to analyze the dividends offered by Conagra Brands because I believe that they are also a valid reason to consider buying the stock.
Dividend History (Seeking Alpha) Looking at the dividend history, we notice a good growth in dividends. In fact, in the last 5 years, there has been a growth of 10.49% per year.
The company currently pays $0.35 per share in dividends. The most notable increase was at the beginning of 2021 when dividends went from $0.
21 per share to $0.28 per share. Regarding the dividend safety, we can note that the payout ratio is 52.
43%, which is a good value even if a lower value would be better. With a payout ratio of 52%, I do not expect a future growth of dividends like the past one. However, it must be considered that the launch of new products could generate an increase in earnings, which could allow the company to increase dividends without increasing the payout ratio too much.
Financial Analysis Balance Sheet (Seeking Alpha) Looking at the balance sheet data, we note that the company has a good availability of short-term assets, but most of them are inventory, which is less liquid than receivables and cash. Regarding inventory, it should also be noted that in recent years there has been an increase in its value: Inventory (Seeking Alpha) This could raise some concerns because it could mean that the goods are in the warehouse for longer and therefore a slowdown in the business cycle. Although it should be considered that the company itself has grown in size in recent years through the acquisition of new brands, so this increase in inventory, in my opinion, is to be considered normal.
As regards financial strength, we can observe the main solvency ratios below: Solvency (Author's calculation) The long-term solvency values are good, while the short-term and very short-term ones are a bit too low. The current ratio is less than one, which means that the current liabilities are greater than the current assets, even if only slightly. The quick ratio, instead, has a rather low value, and this is due to the fact that the company has relatively few availabilities in the form of cash compared to the current liabilities.
These values can be justified by the investments that the company makes every year, both for marketing and advertising campaigns and for the management of the product portfolio. However, it should be taken into account that the short-term solvency is not very good, and this represents a risk factor. As for profitability, we note that there has been a significant decline in the last year: Profitability (Author's calculation) As we can see, already in 2023 there was a decrease compared to the previous year, and so I went to investigate the reason to try to understand which costs have increased in this last period: Income Statement (Company's 10-k) In the latest 10-K released by Conagra Brands, it is possible to understand the reason for the drop in profitability, and in particular, the reasons are two: The first reason is the increase in selling, general, and administrative expenses that in the last year have increased by 13.
30% despite the slight drop in net sales. The second reason is the increase in interest expenses that have increased by 5.10% compared to the previous year.
For this reason, in my opinion, it will be very important to observe the next reports to see if this trend will continue, and this should also be considered a risk factor. Discounted Dividend Model Valuation Since the company has been paying dividends for many years, I decided to use the discounted dividend model to value Conagra Brands. First of all, let’s start by analyzing the historical series of dividends paid annually by the company: Dividends (Seeking Alpha) As you can see, the dividends in the last 5 years have undergone a fairly sustained growth that corresponds to a CAGR of 8.
89%. To estimate the future growth rate, we must take into account the fact that the company currently has reduced profitability, as we have seen, due to the increase in the cost of debt and sales costs. On the other hand, we have the new products and the acquisition of the new brand that could stimulate sales, so I think that adding everything together, we could assume a future growth rate equal to half of that shown in previous years.
Therefore, a growth rate of 4% on dividends, I think, is realistic for the next few years. I chose a dividend growth rate of 4% also because it is close to the sector median according to data provided by Seeking Alpha. Valuation (Author's calculation) As a discount rate, I used a WACC of 7% estimated with the capital asset pricing model , and through the model, the valuation is very positive.
In fact, we get a share price of $48.53, while the price of the shares traded on the market is around $31. Risks and Red Flags I have already mentioned some risk factors to take into account in the financial analysis section, such as short-term solvency and the trend of reduction in profitability.
However, in my opinion, the main risk is that the new products released are not appreciated by consumers. It should be considered that behind a launch of so many varied products, there are a lot of marketing expenses and also expenses to place those products in grocery stores. But if the tastes do not satisfy the needs of customers, Conagra would have a reduction in demand that would lead to very negative effects.
This risk is also underlined in the latest 10-K of the company: For this reason, I think it is important to monitor the trend of future net sales through the analysis of the next reports published by the company. If in the next reports, sales continue to decrease, my evaluation of Conagra Brands could change. Conclusions Conagra Brands is a very dynamic company in the Food and Packaging sector with good potential given the plan to renew the product portfolio, also through acquisitions.
The company has been generating positive results for several years and also pays good dividends that are growing at a good pace. Conagra also has several weak points that are offset by a positive valuation through the discounted dividend model. Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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