Transforming Trends Are Your Portfolio's Best Friend

The trend is your friend is what you want to hear about your stock pick helping a stock soar or even triple like Pilgrim's Pride  (NASDAQ: PPC  ) , a poultry producer. ConAgra Foods (NYSE: CAG  ) , a North American packaged-food company, and Hormel (NYSE:HRL), best known for Spam, are two larger companies, but one doesn't have the trend in its corner.

We love our chicken
Pilgrim's Pride sells its packaged chicken and turkey products in supermarkets and to food-service businesses much like ConAgra. Its price-to-sales ratio of 0.48 is less than its industry average at approximately 0.7, but it has a smallish market cap of $4.12 billion and has almost quadrupled in the last year. Its PEG of 0.78 is another indication of plenty of growth ahead.

Things are cooking at Pilgrim's Pride with Moody's reviewing an upgrade for the poultry company saying, "The review for upgrade reflects PPC's strengthening operating performance, the significant amount of debt repaid over the past year through free cash flow, and Moody's expectation that the operating environment of the U.S. chicken processing industry will remain favorable during most of the next 12 months."

Revenue and EPS have been steadily climbing as the chart below shows. The reason why is simple: US meat consumption is trending down as poultry consumption trends higher, with the average family substituting one or more weekly meals with poultry instead of red meat. As a National Beef Board study proved, more women working equated to less beef (and more chicken) cooking. See an illustrative Freakonomics infograhics here.

More and more meals are eaten away from home and plenty of that is fast-food chicken. Tailwinds are blowing for Pilgrims Pride's consumer and food-service divisions.The company's food-service clients include: Yum! Brands, Wendy's, and another consumer staple, ConAgra.

Revenue (Trailing 12 Quarters)

Earnings Per Share (Trailing 12 Quarters)

We love private label
ConAgra looks good against several industry average ratios: price to sales is 0.9, compared to an industry average of 1.5, and other ratios like price to book, 2.5 to the industry's 4.4, are also good. But there's one thing that looks great, and that's a dividend yield of 3%.

Paying $0.85 for a dollar's worth of ConAgra's sales with that yield is a real bargain. ConAgra has a lower P/S and a lower PEG of approximately 1.3 compared to larger competitor Kraft Foods' P/S of 1.72 and PEG of 2.92. ConAgra offers well-known brands including Slim Jim, Orville Redenbacher, Banquet, and Chef Boyardee for a total of 48 consumer brands found in 97% of American kitchens.

The company operates in three segments: Consumer Foods, Commercial Foods, and the newly acquired Ralcorp making it the largest private-label-brand food business in the US, producing pastas, cereals, mayonnaise, chocolate, cookies, crackers, and peanut butter. The Ralcorp buy was called "transforming" as private-label brands have outperformed consumer brands for the last three years.

Like Pilgrim's Pride, ConAgra has admirably rising revenue and EPS charts. All well and good, but Ralcorp is why you want in. While there have been adjustments to EPS due to the purchase, in its fourth quarter results the company announced it "currently expects cost-related synergies resulting from the Ralcorp acquisition to reach $300 million of annual pre-tax benefit by fiscal 2017," an increase from prior estimates of $225 million.

In fiscal year 2013, the company generated $1.4 billion in cash flow from operations and paid down $400 million in debt.However, on September 10, the company pre-announced a downward revision for diluted EPS and the EPS growth rate for the fiscal year 2014, from $2.40 to a range of $2.34-$2.38, and growth to come in a range of 8%-10% based on weakness in its Consumer Foods segment.

The stock plunged almost 10% on huge volume, but Goldman Sachs upgraded the stock the very next day to Buy with a price target of $42 based on the strength of their Private Label business.

Revenue (Trailing-12 Quarters)

EARNINGS PER SHARE (Trailing 12 Quarters)

But that's not necessarily a reason to buy it when the fundamentals, growth, and yield at rival ConAgra are better. Hormel's PEG is 1.98, higher than ConAgra's. Its price to book ratio is 3.68, also higher than ConAgra's 2.5.We love peanut butter but not Spam
A company that might tempt you is Hormel Foods, not because of its price to sales of 1.31 or its best-known product, Spam, but because it has paid out a dividend, now yielding 1.6%, for 340 consecutive quarters.

Hormel reported earnings on August 21 and disappointed with third-quarter EPS of $0.42, but sales at $2.2 billion were up 8%, partly thanks to its Skippy peanut butter acquisition in January. Compared to the Ralcorp buy, indeed "transforming" for ConAgra, Skippy isn't enough reason to buy Hormel, no matter how much Americans love it. Its Jennie-O Turkey Stores segment just started turning the corner this quarter, but its Spam family's sales declined. Refrigerated foods struggled, weighed down by elevated pork-commodity costs.

In fairness, its international segment outperformed, with revenue up 31%. Chief executive officer Jeffrey Ettinger said on the call:  "International... [has] become a more and more meaningful component of our overall performance and it's one that I think we've articulated in the past. We have solid expectations that it will grow at a faster rate than our overall company average."  He added once Skippy is integrated in China, it should boost business there to $100 million in the next fiscal year.

The Foolish takeaway
There are good reasons to consider ConAgra and those are yield plus Ralcorp. Pilgrim's Pride has more than tripled, remember, so be careful. But the trend is your friend with multi-year chicken consumption on the rise. As for Hormel, these other names are better long-term investments than a consumer staple with declining segment sales.

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