Conagra Brands (CAG 0.40%) continues its makeover to adapt to changing food trends by focusing on branded meals and snacks. The most recent quarter showed those efforts continued to pay off, as earnings per share from operations grew to $0.41 from $0.16 in the previous year.
However, with shares at all-time highs and valuations looking rich, this food company's stock may have gone too far too fast.
Data by YCharts.
A two-year timeline of changes
Back in 2015, Conagra hired Sean Connolly as the new CEO. Coming from executive positions at packaged foods companies Hillshire Brands and Sara Lee, Connolly's goal since arriving has been to narrow Conagra's scope to its branded food business while improving efficiency.
That strategy had already begun upon Connolly's arrival but gained clarification soon after he took the reins. A number of divestitures and acquisitions over the past two years have made the company a smaller but more profitable operation.
| Date | Event |
|---|---|
| May 2014 | Conagra acquires Blake's All Natural Foods, a maker of frozen organic meals. |
| June 2015 |
New strategies for growing the business are announced, which include selling the private label business and aggressively cutting costs. |
| November 2015 |
Conagra announces plans to separate into two companies to help sharpen focus and cut costs. |
| February 2016 |
The private label business is sold to TreeHouse Foods for $2.7 billion cash, which is primarily used to pay off debt. |
| July 2016 |
JM Swank and Spicetec food ingredient suppliers are sold, generating a total of $488 million in proceeds. |
| September 2016 |
The packaged food businesses Frontera, Red Fork, and Salpica are purchased for an undisclosed sum. |
| November 2016 |
Conagra splits into two companies after it spins off the Lamb Weston (NYSE: LW) potato business to shareholders. |
|
March 2017 |
Conagra enters an agreement to buy Thanasi Foods, maker of Duke's Meat Snacks and BIGS Seeds snacks. |
Data source: Conagra Brands.
Image source: Getty Images.
Investors have cheered the changes as they have resulted in higher profits after adjusting for the spinoff of Lamb Weston last fall. The higher profitability comes in spite of lower sales as the company has slimmed down its food operations and overhead at the corporate level by eliminating positions. Now a leaner and more efficient company, the plan going forward will be more of the same.
Targeting higher-quality food sales
The new company focus is on high-quality pre-packaged food brands. Its recent acquisitions have been of "all-natural" and "high-quality" food and snack companies. The lineup of names is already quite extensive, including staples like Hunt's tomatoes and Peter Pan peanut butter and the frozen meals business of Marie Callender's and P.F. Chang's.
Conagra sees itself as an innovator in the food industry. Part of Conagra's self-description reads this way: "Guided by an entrepreneurial spirit, Conagra Brands combines a rich heritage of making great food with a sharpened focus on innovation." Innovation, in this context, basically means mergers and acquisitions that bring new products into the fold.
However, even though profit is on the rise, debt has been reduced, and the company has set itself up to go shopping for those innovative new food makers, that doesn't mean the stock is worth buying.
Image source: Frontera.
Optimism about the remade Conagra Brands has shown up in the relentless rise of shares in the last few years and valuation looks pricey at this point. The trailing price-to-earnings ratio is sitting at 28 and the forward price-to-earnings ratio based on one-year estimates is 21. For reference, the overall S&P 500 trailing P/E ratio is at 25 and the one-year forward P/E is at 18. Conagra's 28 looks like a steep price to pay for a food company, even if "innovation" is used in the tag line.
Conagra is putting in some hard work to reduce expenses and update its portfolio for modern tastes that lean toward higher quality and more "natural" foods. While that is equating to growth on the bottom line, the stock's rise has already taken into account future growth. I don't see enough upside left in the foods and snacks industry to warrant a purchase at this point.
