Conagra Stock: Volume Struggle Drives Low 12.3x TTM P/E (NYSE:CAG)

Conagra Manufacturers (NYSE:CAG) could be sitting at 52-weeks lows however the firm is scuffling with quantity declines and a stale portfolio. With low profitability, curiosity protection is tight from the 2018 Pinnacle Meals acquisition nonetheless and can proceed to pull on earnings within the larger curiosity setting. The corporate is beginning to get my consideration on the new valuation however I wish to see volumes recuperate earlier than I get excited by this mature firm’s low P/E.

Newest Quarterly Outcomes

Conagra not too long ago reported their Q1 fiscal year 2024 results on October fifth and the share worth reveals the continued disappointment. Within the quarter, web gross sales had been $2.9 billion with a 0.3% lower in natural web gross sales offset by a 0.3% improve from the favorable FX impacts. The 0.3% lower in natural web gross sales was pushed by a 6.6% lower in quantity and defined by administration as largely on account of an industry-wide slowdown in consumption and up to date client habits shifts. These steep quantity declines had been partially offset by a 6.3% enchancment in worth/combine, to maintain gross sales comparatively flat general. Within the prior yr Q1 2023 quarter, volumes additionally confirmed a YoY decline of 4.6% in a worrying development that goes past a pair quarters.

Volumes stay within the dumps, down round 7-8% from prior yr averages as may be seen from the under slide within the Q1 FY 2024 presentation. That is in the course of the peer set Conagra makes use of however on the low finish of sure opponents I’ve written about not too long ago corresponding to Normal Mills and Kraft Heinz have quantity decreases across the 2% and seven% degree, respectively.

The corporate reaffirmed its fiscal 2024 steerage reflecting natural web gross sales progress of roughly 1.0% in comparison with fiscal 2023 with adjusted working margin between 16.0% and 16.5%. EPS steerage from administration is for an adjusted EPS between $2.70 and $2.75 which on the midpoint would place Conagra meals at a ten.1x ahead P/E for a 9.9% earnings yield. It is a good adjusted earnings yield which we’ll evaluate later on this article to some historic yields primarily based off money flows and fairness returns.

A Mature Firm with Mediocre Earnings

Conagra’s model portfolio has allowed the corporate to take care of a mediocre degree of profitability and return respectable money flows to shareholders. Since 2018, the corporate has solely achieved common return on fairness (ROE) and return on invested capital (ROIC) of 10.8% and 6.4% respectively. This degree of profitability is properly under my rule of thumb of 15% ROE and 9% ROIC, giving me pause whether or not, for my part, the corporate is ready to keep its intrinsic worth sooner or later.

The low ROIC simply staying above 5% by the 5-year interval is seeking to be barely leverageable at right now’s present rates of interest and I might be nervous going ahead in regards to the giant debt load if charges do not lower. Within the TTM interval, curiosity expense was $418.5 million, a rise of $35.7 (+9.3%) from fiscal 2022. The rise was pushed by the next weighted common rate of interest on excellent debt in a development I see set to proceed. On the expansion aspect over the identical interval, income progress has averaged solely 6.5% yearly, with unadjusted diluted EPS growing 10.1% and dividends rising at 12.1% annualized over the interval. Let’s get into shareholder returns now and have a look at money flows.

Sturdy Model & Big Extra Money Flows

Sturdy mature companies with well-known manufacturers corresponding to Conagra Manufacturers are in a position to generate money past what is required to fund operations. If we exclude the $10.1B Pinnacle Foods acquisition, capital expenditures have taken up on common 30% of money circulate from operations over the previous 5 years. This would depart 70% to be returned to traders within the type of dividends and share repurchases.

With common money circulate from operations of $1.3 billion over the previous three years, this 70% would indicate free money circulate to shareholders of $928 million for round a 7.0% free money circulate yield on the present $13.2 billion market capitalization. It is a decently excessive free money circulate yield on the close to 52-week low inventory worth for Conagra Meals. Including a conservative progress charge of three% to signify the corporate progress alongside world progress may carry this yield above my goal 9% charge.

Curiosity Protection & Debt

Since 2018, finance leverage at Conagra has decreased barely to 2.50x as may be seen within the chart under however share repurchases haven’t been an everyday a part of shareholder returns which I prefer to see usually. The corporate’s curiosity protection ratio stays tight at 3.8x within the TTM interval as a result of low profitability of the belongings being leveraged. It is a low degree of curiosity protection and one thing I count on to harm Conagra’s profitability within the years to return as sensitivity to curiosity bills adjustments are extra important from Conagra than opponents. For instance, Kraft Heinz (KHC) additionally has a big debt load however has larger curiosity coverages ranges round 5.5x as of their TTM interval since after I final wrote about them.

Getting a Sense of Valuation

Conagra’s 12.3x TTM P/E ratio will also be expressed as a 8.1% earnings yield, however I additionally all the time like to look at the connection between common ROE and price-to-book worth in what I name the Buyers’ Adjusted ROE. It examines the common ROE over a enterprise cycle and adjusts that ROE for the value traders are presently paying for the corporate’s guide worth or fairness per share. Conagra has a mediocre ROE, however potential returns for traders rely upon the a number of paid for the guide worth of fairness within the public inventory market.

With Conagra incomes a mean ROE of 10.8% since 2018 and shares presently buying and selling at a price-to-book worth of 1.48x when the value is $27.68, this may yield an traders’ Adjusted ROE of seven.3% for an traders’ fairness at that buy worth, if historical past repeats itself. This no progress charge is properly under the 9% that I prefer to see, however including conservative 3% progress to signify the corporate rising alongside GDP may transfer it into my goal yield. Beneath is a desk outlining the potential earnings yield estimates from this traders’ adjusted ROE determine in addition to the money circulate and earnings yields mentioned.

Takeaway for Buyers

Conagra is a mediocre firm that’s buying and selling at an excellent worth of 12.3x TTM P/E. The corporate is having points with quantity progress, albeit, many basic client staple manufacturers are as properly. Income progress has been respectable over the mid time period however I wish to see volumes come again to life earlier than getting too excited as money flows are solely contemplating natural capital expenditures to drive progress.