Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Is Big Food Making Money at Conagra?

In theory big food companies such as Conagra Brands Inc. (NYSE:CAG) appear to be a perfect value investment.

To explain, Conagra makes a product everybody needs all the time; food. Thus, Conagra has a recession-proof business with a mass market. However, to be a value investment Conagra needs to make money.

Currently, Conagra (NYSE: CAG) makes money. For instance, Conagra reported a quarterly gross profit of $797 million on quarterly revenues of $2.82 billion on 30 November 2019. In addition, Conagra reported an operating income of $439.4 million and net income after tax of $233.9 million for the quartered ending on 30 November 2019.

Is Conagra a Value Investment?

Thus, Conagra makes money and its stock is cheap. Mr. Market was paying $32.69 for Conagra shares on 23 January 2020.

Additionally, Conagra generates cash. It reported an ending cash flow of $127.3 million and an operating cash flow of $220.5 million for the quarter that ended on 30 November 2019.

However, Conagra keeps little cash. For instance, Conagra reported $192 million in cash and short-term investments on 30 November 2019. Therefore, I conclude Conagra is not a value investment. In my opinion, a company needs to be cash-rich to be a real value investment.

What Value does Conagra have?

Conagra has a vast amount of potential value in the form of the many food brands it owns.

The brands owned by Conagra include; SlimJim, Hunt’s tomatoes, Angie’s, Vlasic pickles, Reddiwip, Birdseye, Orville Redenbacher’s popcorn, Udi’s, Pam, Marie Callender, Van Camp’s, Van De Kamp’s, and Frontera, Egg Beaters, Fleischmann’s Yeast, P.F. Chang, and Duncan Hines. Therefore, Conagra fills the shelves of North America’s supermarkets.

How Amazon Threatens Conagra

Thus, Conagra faces a huge threat in the form of Amazon (NASDAQ: AMZN). For instance, Amazon and Instacart, allow people to shop for groceries without going to the store. Thus, the shoppers do not see the shelves or the brand.

Moreover, modern retailers such as Amazon emphasize private-label brands. Private label brands are products sold under the name of a retailer. Retailers; such as Kroger (NYSE: KR), push private-label brands because they offer a higher profit margin.

Kroger, Walmart (NYSE: KR), and Amazon make more money from private lands because of volume. To explain, if the price is low enough, you can sell huge volumes of merchandise and make vast amounts of money.

The Destruction of Brands

Hence, the Kroger, Amazon, Walmart, and Costco Wholesale (NASDAQ: COST) business model is the destruction of consumer brands. The ultimate goal at Kroger, Amazon, Walmart, and Costco is a customer who buys “pickles” instead of Vlasic.

Consumer brands are weakening because of retail centralization and the collapse of old media. Historically, consumer brands relied on mass media such as television that most people saw.

However, today’s media environment offers no true mass media. To explain, back in 1980 everybody was watching one of the big three TV networks. Today, however, people have many sources of entertainment.

Will the Death of Television be the End of Brands?

For example, you could play Fortnite, listen to Podcasts, watch Amazon Prime video or Netflix (NASDAQ: NFLX), YouTube, Facebook videos, or Disney+, and more if you want entertainment. Consequently, Conagra will need to advertise on all those media to reach consumers.

For example, the highest-rated network TV show; CBS’s FBI: Most Wanted had 7.189 million viewers during the week of 12-17 January 2020, TV Series Finale estimates. In contrast, Worldowmeter estimates the United States had a population of 331.03 million in January 2020. Thus, I estimate a little over 2% of the US population watches the most popular network television show.

The network ratings among specific groups are worse. For instance, just 0.8% of Americans between 18 and 49 years of aged watched FBI: Most Wanted during the week 16 of the current television season, TV Series Finale estimates.  

Can Conagra Survive the Age of Amazon?

Under these circumstances, I think Conagra faces a brutal battle for survival.

In particular, Conagra will need to find new ways to reach customers. New means of reaching customers could include social media or exclusive deals with online retailers.

Conagra could create exclusive brands or products for Amazon, for example. An example of such a product could be Marie Callender pies they only sell through Amazon Prime.

Such reliance on Amazon will be dangerous because Amazon will control the pricing. Amazon could offer its own cheaper private label brands. Additionally, Amazon could throw Conagra brands off Prime any time it wants.

Unfortunately, Conagra could have no choice because most of its consumers will be on Amazon. Consequently, Jeff Bezos could end up making many of Conagra’s decisions for it.

Is Conagra a good Dividend Stock?

Given these realities, I think the only reason to own legacy consumer stocks such as Conagra Foods (NYSE: CAG) is dividends.

Conagra; for instance, will pay a 21.25₵ quarterly dividend on 30 January 2020. However, Conagra only offers one year of dividend growth, reports.

In total, Conagra offered a dividend yield of 2.63%, an annualized payout of 85₵, and a payout ratio of 40.13% on 23 January 2020. Thus, you can make money from Conagra.

My recommendation is to own Conagra for the dividend but be ready to dump it fast. You could need to dump CAG fast because this company could lose all of its value overnight in today’s consumer market.