Tuesday, March 2, 2021

A Small Cap Equity holding: Conagra Brands, Inc. (CAG, $34.78): “No Cons to Conagra, Only Pros” by: Michael Ribaudo, AIM Student at Marquette University

  Conagra Brands, Inc. (CAG, $34.78): “No Cons to Conagra, Only Pros”

By: Michael Ribaudo, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


• Conagra Brands, Inc. (NYSE: CAG) participates in the manufacture and sale of processed and packaged foods for supermarkets and restaurants. They operate primarily in the United States, while a portion of their revenue is generated from Europe and Asia.

• CAG offers products under the brand names: Birds Eye, Marie Callender’s, Banquet, Slim Jim, Healthy Choice, Reddi-wip, and many more.

• CAG has made strategic acquisitions. Most notably acquiring Pinnacle Foods which boosted CAG in the shelf-stable frozen foods sector.

• The acquisition of Pinnacle Foods is on-track of achieving cost synergies of $305 million per year.

• The frozen food industry is expected to grow to $312.3 billion representing a 5.0% CAGR from 2020-2025.

Key points:

Conagra acquired Pinnacle Foods in October of 2018. The company is still well on track of achieving $305 million per year in cost synergies related to this acquisition. This acquisition placed Conagra in a great strategic position to meet the highly competitive industry. The acquisition grew FY2020 net sales in the following segments by: Grocery & Snacks ($406.3 million), Refrigerated & Frozen ($567.6 million), International (46.0 million), and Foodservice (57.7 million).

The COVID-19 pandemic has not affected Conagra’s ability to create profits. The Foodservice segment has seen reduced demand as away-from-home food outlets being shut down. The company expects this to remain the same until away-from-home food outlets begin to open and stabilize. Over the 26 week period of FY2021 net sales have increased 14% in the Grocery & Snack segment, 12% in the Refrigerated & Frozen segment, 7% in the International segment, and decreased (23)% in the Foodservice segment. 

Conagra consistently reevaluates their brands and if they are not producing the sales increases expected, they tend to divest their underperforming brands. Recently, CAG has been shifting away from selling peanut butter under private label names. Their recent divestiture has been under the brand name Peter Pan peanut butter. Conagra is selling Peter Pan peanut butter to Post Holdings for $102 million and it is expected to be completed in Q3 FY2021. This makes Conagra 

Conagra is also becoming highly innovative with their products. By creating new products to fit niche markets. With the introduction of plant based Gardein soups, avocado oil popcorn, and Healthy Choice Grain-Free Power Bowls, Conagra is expanding at a rapid rate to meet health conscious consumer demand.

What has the stock done lately?

The stock over the past year has seen a slight increase. Since last year at this time it has increased roughly 7.9%. This is a relatively good sign because it has rebounded from its 52 week low which occurred in mid-March of $22.83 which is ~52% lower from its current share price. CAG pays a 3.16% dividend.

Past Year Performance: CAG has increased ~7.9% in the past year. Net income for FY2020 was at an all time high of $840 million. That is a 23.5% increase from FY2019. Revenue also increased 15.4% in FY2020 from FY2019. In Q2 FY2021 CAG net income grew by 45.5% while their sales grew by 6.2% from Q1 FY2021. The company is increasing profit margins and continuously growing. The 52 week range of CAG is $22.83- $39.34. Their earnings have been growing for the past two fiscal quarters and in Q2 FY2021 their diluted EPS was $0.77.

Source: FactSet

My Takeaway

Since being added to the AIM program at $36.03 per share with a price target of $49.64 we are currently down ~3.6%. Although we are down on this position I see upside to this stock. The strategic acquisitions taking place, along with further development of innovative foods keep Conagra interesting. Their large market share of diversified products, and divestiture of lower margin product lines or brands lead me to believe that holding this equity as part of the AIM Small Cap portfolio is the best option. 

Source: FactSet