Description

At 9.7x E2025 EV/EBITDA and 11x E2025 P/E, Conagra (“CAG”) is cheap relative to its historical valuation, CPG peers, and the broader market. With very modest earnings growth (1-3%) and no multiple expansion, an investor can generate a ~10-12% return annualized over the next three years, with what I believe is minimal downside given the historically cheap valuation and defensibility of the business.   

Conagra has a good portfolio of brands in attractive categories of the store (snacks/frozen/refrigerated). The management team, led by Sean Connolly who was CEO when Hillshire sold to Tyson in bidding war in 2014 and owns ~1m shares of CAG, is among the better teams in CPG. CAG Management appear to have shifted their focus to debt-reduction rather than acquisition as evidenced by commentary on the last earnings call and the CAGNY conference presentation in January (worth a listen for anyone interested). This may not seem like a major strategy shift, but capital allocation is a source of better returns in CPG given that the maturity of the end markets, zero-sum nature of CPG end markets (once consumer preference shifts), and effective family/major shareholder control can lead to leveraged-fueled deals in the space.

The overall CPG space has been somewhat depressed based on a number of factors, including worries about GLP-1s changing consumer behavior (buying healthier foods/buying less frequently), lapping of price increases from 2022-2023, volume declines, mature end markets, higher rates making the names less attractive as bond-yield equivalents, and an overall lack of a good story around growth or technology that has benefitted other areas of the market.

Still, CPG has its virtues; the businesses are relatively economically defensive (people have to eat), and the stocks may do better in a difficult market environment (though who knows). With CAG you get good category exposure, a ~4.5% dividend, long-term attractive low-cost debt, and the possibility that the company could be acquired given its size, independent ownership structure, and strong brands with good positions in frozen/refrigerated and snacks.

Conagra owns a portfolio of consumer foods brands, including Birds Eye, Marie Callender, Duncan Hines, Healthy Choice, Gardein, Hunt’s, Slim Jim and Orville Redenbacher, among others. The company breaks out its reporting into four segments: 1) Grocery and Snacks, 2) Refrigerated and Frozen, 3) International, and 4) Foodservice. In 2023, the business generated ~$12B in sales; grocery and snacks generated was $4.9B; refrigerated and frozen was $5.1B; international was $1B; and foodservice was $1.1B. Conagra has ~$7.4B of long-term debt with ~$3.8B of the debt due between 2028-2048.

Refrigerated/frozen and Snacks are two of the better areas of CPG, depending on the brands. CAG points to data that “better-for-you” frozen meal consumption increases 8% among people who use weight-loss drugs (according to Numerator), and that snacks that are high in protein (Slim Jim), or low-calorie, high-fiber (Popcorn (Orville/Angieboomchickapop) should do well among GLP-1 users. Conagra’s frozen brands (Birds Eyes/Marie Callender) are also well-positioned in single serve frozen meals, and frozen vegetables.  Frozen also offers convenience. Frozen shelf-space is scarce, and the supply chains are difficult to manage. With roughly 40% of sales coming from Refrigerated/Frozen, CAG is one of the leaders in Frozen/Refrigerated among CPG.

            Taking a broader view, the market seems unlikely to be completely defined by the GLP-1s and healthy eating. There is, and should remain, a large market for a shelf-stable, well-known household foods brands that serve a range of tastes and household needs, of which CAG owns many. Crucially, as far I can tell, CAG is diversified and is not overly exposed to one category (RTD cereal, condensed soup/salty snacks) that could be slightly more susceptible to GLP-1 risk, or the specter of it.  

At a high-level, the CPG space is more interesting than meets the eye because of how different the underlying companies are in terms of product and brand mix, category exposure, capital allocation philosophy and ownership structure.  The differences tend to get overlooked. To site just a few examples, General Mills and Smucker have made large forays into the pet category, Campbell’s/Smucker have both demonstrated a recent willingness to do large acquisitions funded by debt (Sovos/Hostess (Smucker also sold some pet brands)), Post (by far the best performing) has been the most flexible in terms of corporate structure/spin-offs.

The category exposure also varies (GIS/WK/Post-RTD Cereal); CPB (condensed soup); Smucker (ground coffee). Some of the businesses are family controlled and are unlikely to be sellers, some are effectively PE controlled and have been used as acquisition vehicles (KHC), and some have what can likely be considered long-term family/corporate ownership (TR/Hershey/CPB) that makes them unlikely to be for sale. The actual number of cheap, independent, diversified CPG companies not bent on acquisition, that could actually be sold, is fairly small. CAG is one.

 Given that sound capital allocation and an outright sale of the business are two ways that a stock in the sector can outperform, CAG stands-out as one of the more attractive names (Post is another). Post has dramatically outperformed peers---based in part I believe on a recent signaling of the intent to use FCF to pay down debt. I think there is a good chance CAG can outperform peers from here based on what is signaled it will do (pay down debt) and what is it unlikely to do (lever up to make a big purchase).

Conagra’s Valuation is attractive on an absolute and relative basis

Company                                 2024 EV/EBITDA                                 2025 EV/EBITDA

CAG:                                        10x                                                      9.7x

GIS                                           12.4x                                                   12x

Smucker:                                 11.9x                                                   10.4x              

Kellanova                                11.5x                                                   11x

KHC                                         9.8x                                                     9.5x

Hormel                                    14.9x                                                   14.1x

CPB                                          9.6x                                                     8.7x

On an EPS basis, CAG trades at ~11.4x estimated 2024 EPS, and ~11x estimated 2025. The P/E multiple is below the five-year forward average of ~13x and is well below the market multiple. I believe the durability and historically good economics of a diversified scaled packaged goods company with good category exposure should get a higher multiple, but even with no-rating, and very modest earnings growth (1-3%) p.a., an investor could make low double-digit return buying CAG.

Catalyst

multiple trades closer to historical range

debt paydown

sale of the company