Option Trade 
ConAgra Foods Inc (NYSE:CAG) Puts
Wednesday, September 27, 2017

** OPTION TRADE: Buy the CAG OCT 20 2017 33.000 PUT at approximately $0.75. Place a pre-determined sell at $1.50.

Note: No protective stop losses added -- but if you wish to do so make it $0.30.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

U.S. packaged food makers, including General Mills, Conagra Brands and Kellogg, have been facing falling demand as consumers increasingly prefer fresh, organic products over packaged and frozen food.

The sector is expected to come under renewed pressure with the entry of online giant Amazon.com into the brick-and-mortar grocery stores business through its deal to buy Whole Foods Market.

ConAgra Foods Inc (NYSE:CAG), an operator of a packaged food company, is set to report its fiscal 1Q18 results on tomorrow, September 28, 2017, before the market opens. Analysts expect Conagra to post earnings of $0.40 per share, down 34% on a YoY (year-over-year) basis.

Conagra is busily restructuring its portfolio as well as removing  underperforming and low-margin brands; which will likely result in lower sales and lower profitability.

Lower volumes, unfavorable price/mix or adverse foreign currency translation impact might continue to weigh over the company's Grocery & Snacks, Refrigerated & Frozen, and Foodservice, and International segments' sales in the quarters ahead.

As well, price inflation of major raw inputs such as soybeans, pork, oats, beef, poultry, wheat and corn might hurt near-term margins of Conagra.

In addition, intense rivalry in the industry might mar near-term top- and bottom-line performance as well.

Conagra stock is down about 15.5% on a YTD (year-to-date) basis as of September 21, 2017. In comparison, shares of other food manufacturing companies have also fallen and are trading in the red on a YTD basis.

ConAgra Foods Inc. has a market capitalization of $13.81 billion, a price-to-earnings ratio of 22.71 and a beta of 0.33. The company has a 50 day moving average price of $34.12 and a 200 day moving average price of $37.15. ConAgra Foods Inc. has a one year low of $32.16 and a one year high of $41.68.

Influencing Factors to Consider

Investors are wary of the fact that continued volume decline and increased input costs could hurt the company’s margins and EPS. Plus, the company’s EPS could also take a hit from retailers reducing shelf space for packaged foods as they focus more on fresh and healthy foods to drive store traffic.

These trends were evident in rival General Mills’ (GIS) recent earnings miss.

The company is exiting the low-margin business and shedding non-core brands, which could hurt volumes in the near term but could result in a high-quality revenue base in the long term.

Conagra’s management projects its net and organic sales to remain flat or fall 2% in fiscal 2018. The company’s portfolio restructuring initiatives and lower demand are expected to adversely impact its sales growth.

Conagra Brands’ operating margins grew more than 300 basis points during the first three quarters of fiscal 2017. However, in fiscal 4Q17, the company’s operating margins improved by 100 basis points, a much slower rate when compared to the previous three quarters.

Management expects adjusted operating margins to improve by ten to 50 basis points in fiscal 2018, a much slower rate when compared to the 310 basis-point expansion registered in fiscal 2017. The company’s investment in innovation, an anticipated increase in input costs, and soft sales are likely to restrict the margins growth rate.

The company's projected 5-year EBITDA CAGR of 8.1% is right in the middle of the pack relative to its comparable companies. This should mean that ConAgra Brands' valuation multiples should trade at a discount as a result of its mediocre growth forecast and weak margins.

Also, Campbell Soup's disappointing earnings report on August 31st where the stock dropped nearly 10% highlights a bearish stance. Its CEO Denise Morrison said on the earnings call that "several variables are at play including value players expanding their presence in the U.S., the growth of store brands and the explosion of e-commerce and meal delivery services disrupting the market... We expect conditions to remain hyper-competitive for the foreseeable future."

Conagra Brands stock has largely underperformed the S&P 500 Index (SPX-INDEX) and the Consumer Staples Select Sector SPDR ETF (XLP), which rose 9.3% and 5.8%, respectively, during the same period.

Analysts and Hedge Funds Opinions

Most of the analysts providing recommendations on Conagra Brands (CAG) stock continue to maintain a positive outlook. However, several analysts lowered their target price on Conagra stock following the company’s fiscal 4Q17 results and lower margin projection.

Given the soft sales trend and slowdown in margins’ growth rate, the company’s stock could witness rating changes in the coming quarters.

Weak consumer uptake will likely restrict these companies’ growth rates. The tough retail environment and negative currency movements are expected to remain a drag.

Zacks Investment Research raised shares of ConAgra Foods from a “sell” rating to a “hold” rating in a research note on Friday, June 2nd.

Several other analysts have also recently commented on the company…..

  • Credit Suisse Group reissued a “hold” rating and set a $39.00 target price on shares of ConAgra Foods in a research note on Friday, August 11th.
  • BidaskClub raised shares of ConAgra Foods from a “strong sell” rating to a “sell” rating in a research note on Saturday, August 12th.
  • UBS AG reissued a “sell” rating and set a $33.00 target price (down from $35.00) on shares of ConAgra Foods in a research note on Friday, June 30th.
  • J P Morgan Chase & Co reduced their target price on shares of ConAgra Foods from $45.00 to $44.00 and set an “overweight” rating for the company in a research note on Wednesday, May 31st.

As well, insider trading occurred……

  • Director Ruth Ann Marshall sold 6,046 shares of ConAgra Foods stock in a transaction that occurred on Wednesday, July 12th. The shares were sold at an average price of $33.22, for a total transaction of $200,848.12.
  • Also, Director Stephen G. Butler sold 5,848 shares of ConAgra Foods stock in a transaction that occurred on Monday, July 3rd. The stock was sold at an average price of $35.80, for a total transaction of $209,358.40.

Harvey’s Options Volatility Indicator


For most of the food manufacturing companies in the US, stock prices are witnessing a steep downtrend. Weak consumption due to consumers’ shift towards healthy foods is taking a toll on their financials. Meanwhile, stiff competition among retailers on the price front, the rise of private label products, and fresh foods’ low prices continue to pose challenges. The industry-wide challenges probably won’t subside in the foreseeable future. There isn’t as much hope for a recovery in these stocks in the near term.

As for Conagra Brands, the company’s sales are taking a hit from lower volumes, portfolio restructuring, and negative currency movements. The company has taken several measures to improve its sales—a shift from offering deep discounts, innovation, and portfolio premiumization. However, it will take time for the efforts to have a meaningful impact on the sales growth rate. For fiscal 2018, the company’s top line is expected to remain muted. For its margins, the growth rate is also projected to slow down compared to the previous fiscal year.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the CAG OCT 20 2017 33.000 PUT at approximately $0.75. Place a pre-determined sell at $1.50.

Note: No protective stop losses added -- but if you wish to do so make it $0.30.


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