Conagra Brands: Undervalued Gem or Trapped in a Decline?

Conagra Brands (CAG) has been a poster child for underperformance over the past five years, with its stock price plummeting 42%—far outpacing the 15% annual decline in earnings per share (EPS). This disconnect between valuation and fundamentals invites scrutiny: Is this a buying opportunity, or does the stock's decline reflect deeper, unresolved issues? Let's dissect the numbers and weigh the risks against potential catalysts for recovery.

The Stock Price vs. EPS Disconnect

At first glance, the stock's 42% decline over five years appears extreme. However, the EPS has fared even worse, dropping 65% cumulatively from $1.72 in 2020 to just $0.72 in 2024. This suggests the market is pricing in more than just current earnings weakness—it's anticipating further deterioration. Yet, the stock hasn't collapsed to the same degree as EPS, hinting at a potential valuation floor.

Dividend Resilience Masks Underlying Stress

While the stock price has been volatile, Conagra's dividends have been a lifeline for shareholders. Despite EPS declines, the dividend per share rose from $0.21 in 2020 to $0.35 in 2023, yielding 4.7% at current prices. However, this “resilience” is misleading: the payout ratio (dividends relative to earnings) hit 190% in 2024, meaning dividends now exceed earnings. Sustaining this would require a turnaround in profitability—a tall order given rising commodity costs and margin pressures.

The Total Shareholder Return (TSR) Dilemma

The -30% five-year TSR (factoring in dividends) is a stark reminder of the risks. While dividends softened the blow compared to a -42% pure price decline, the overall return remains deeply negative. Investors must ask: Is the dividend a sustainable advantage or a ticking time bomb? With EPS struggling, a dividend cut could trigger further selling—a risk no investor should ignore.

Fundamentals: A Mixed Bag

Catalysts for Recovery

1. Cost-Cutting and Portfolio Restructuring:
   Conagra has trimmed its portfolio, shedding underperforming brands to focus on high-margin lines like Healthy Choice and SlimFast. Additionally, $300 million in annual cost savings by 2025 could stabilize margins.
2. Brand Revitalization:
   Legacy brands like Giovannitti's and Marie Callender's still command shelf space, but they need modernization. A renewed focus on e-commerce and direct-to-consumer sales could reignite growth.
3. Dividend Yield as a Draw:
   At 6.4%, the trailing yield is attractive for income investors, though it comes with the aforementioned payout ratio risk.

Warning Signs

• Insider Sell-offs: Notably, CFO Thomas McGoogh sold over $119 million in shares since 2023, signaling reduced confidence.
• Structural Challenges: The packaged food industry faces a shift toward fresh, premium products, squeezing demand for frozen meals and snacks.
• Debt Overhang: With $5.4 billion in debt, Conagra has limited flexibility to invest in innovation or acquisitions.

Is the Stock Undervalued?

A valuation analysis suggests the stock is 41% below its intrinsic value of $34.48, based on discounted cash flows. Analysts' average price target of $25.29 (a 24% upside from current levels) hints at cautious optimism. However, this assumes management can execute on its cost and portfolio plans—a big if.

Investment Thesis: Proceed with Caution

Bull Case: If Conagra achieves its cost targets, stabilizes margins, and divests non-core assets, the stock could rebound to $30–$35. The dividend, while risky, offers downside protection.

Bear Case: Persistent margin pressures, a dividend cut, or further share sales by insiders could send the stock toward $15–$18.

Final Take

Conagra Brands is a classic “value trap” candidate—cheap on paper but burdened by execution risks. The stock's decline isn't unjustified, but the $20.40 price may reflect excessive pessimism. For aggressive investors willing to bet on a turnaround, a small position could be warranted. For most, however, wait for clearer signs of margin stabilization or a dividend reset before diving in.

Final Advice: Hold or dip your toes in cautiously, but keep a close eye on cost-cutting progress and insider activity. This isn't a “set it and forget it” investment.