Conagra Brands Inc. (NYSE: CAG) is a value investment driven by comfort food.
To explain, Conagra Brands (CAG) owns several popular consumer food brands. Those brands include; Pam, Udi’s Gluten Free, Orville Redenbacher’s popcorn, Birdseye, Vlasic Pickles, Reddi Whip, Marie Callender’s, Hunt’s, Healthy Choice, Duncan Hines, and Slim Jim. Those brands sell because of consumer recognition.
An obvious hope of Conagra investors is that consumers rattled by COVID-19 will reach for familiar brands. For instance, people stuck at home will eat familiar foods including Vlasic Pickles and Hunt’s tomatoes.
Did Conagra Brands make money in 2020?
Conagra Brands’ (CAG) revenues support that thesis. Stockrow estimates Conagra’s revenues grew by 25.82% in the quarter ending on 31 May 2020 and 8.45% in the quarter ending on 28 February 2021.
In contrast, Conagra’s revenues fell by -5.62% in the quarter ending on 29 February 2020. Thus, Conagra Brands’ revenues grew in 2020.
Conagra is making more money. Conagra Brands’ quarterly operating income grew from $380.90 million on 29 February 2020 to $462.40 million on February 28, 2021. Similarly, Conagara Brands’ quarterly gross profit grew from $701 million on 29 February 2020 to $762 million on 28 February 2021.
Overall, Conagra Brands’ quarterly revenues grew slightly from $2.555 billion on 29 February 2020 to $2.771 billion on 28 February 2021. Thus, Conagra Brands made more money during the pandemic year of 2020.
How Much Cash does Conagra Brands Generate?
Conagra Brands (NYSE: CAG) quarterly operating cash flow grew from $479 million on 29 February 2020 to $528 million on 28 February 2021.
Conversely, Conagra’s quarterly ending cash flow rose from -$93 million on 29 February 2020 to $12.70 million on 28 February 2021. I think the ending cash flow is low because Conagra Brands is paying off enormous of debt.
For instance, Conagra Brands reported a quarterly financing cash flow of -$503.60 million on 28 February 2021. Hence, Conagra Brands’ paid off $503.60 million in debts. Conagra has reported a negative quarterly financing flow of several hundred million dollars six straight quarters.
Consequently, Conagra’s total debt fell from $10.283 billion on 29 February 2020 to $9.227 billion on 28 February 2021. Thus, Conagra Brands’ debt shrank during the pandemic.
What Value Does Conagra Brands Have?
Conagra Brands (NYSE: CAG) offers some value. For instance, Conagra Brands had $22.105 billion in total assets on 28 February 2021. The total assets shrank from $22.202 billion on 29 February 2020.
However, Conagra Brands has a small amount of cash. Conagra Brands reported $81 million in cash and short-term investments on 28 February 2021. The cash and short-term investments shrank from $99 million on 29 February 2020.
Therefore, Conagra Brands keeps little of the cash it generates. Instead, the cash goes to pay debt. I think that shows Conagra Brands is an unhealthy company.
In my opinion, healthy companies accumulate cash, while unhealthy companies burn cash. Cash makes a company healthy because cash creates a high margin of safety. Thus, Conagra has a low margin of safety because it does not accumulate cash.
Conagra Brands is a Poor Investment
Consequently, I consider Conagra Brands (CAG) a poor investment despite the low share price of $37.56 on 14 May 2021. In addition, the share price growth is limited. Mr. Market paid $33.41 for CAG on 11 May 2020.
I think the only attractive thing at Conagra is the 27.5₵ quarterly dividend it will pay on 2 June 2021. That dividend grew from 21.4₵ on 3 September 2020.
In total, Conagra offered a $1.10 annualized dividend and a 2.88% dividend yield on 2 June 2021. Thus, Conagra offers an attractive dividend. Unfortunately, I think they get the money for that dividend by spending the cash the company needs to accumulate to grow.
I advise smart investors to avoid Conagra Brands. Instead, I think investors who want to profit from food, need to investigate retail stocks such as Kroger (KR) and Walmart (WMT) as alternatives. I believe those companies grow and offer a margin of safety. Conagra grows but offers no margin so I advise investors to avoid it.
Originally published at https://marketmadhouse.com on May 14, 2021.