ConAgra Foods, Inc. (CAG): The Three Big Risks in This Stock

The third issue is that its commercial foods segment saw its potato operations (Lamb Weston) lose a major long-term customer. This will reduce EPS by $0.10 next year.The contract loss will also hit margins, but ConAgra expressed confidence that it would make up for it. Again, the management needs to deliver.

In addition, ConAgra talked of “short term challenges in Asia,” which caused profits to decline for its potato operations for the quarter. Frankly, I don’t believe in coincidences, and anyone looking at McCormick & Company, Incorporated (NYSE:MKC)’s latest results would note that it reported weakness from its quick service restaurant customers in both China and the Americas. Yum! Brands, Inc. (NYSE:YUM) is a major customer of McCormick and much of its problems are company specific but the truth is that it’s Chinese same store sales growth has been falling since the first quarter of 2012.

In addition McCormick & Company, Incorporated (NYSE:MKC)’s industrial growth has been negative for the last two quarters. Is this a short term issue or is it a deeper one relating to slowing quick-service restaurant sales growth? These types of restaurants are major customers of ConAgra’s potato operations.

The bottom line

In conclusion, I think these three concerns require you to express a fair amount of confidence in the management to execute over the next year. This might be okay if the stock traded on a more attractive valuation. A forward PE of around 13 may look attractive, but recall that the company has to pay off significant amounts of debt.

Looking at these companies’ current enterprise values (EV) in relation to their earnings before interest, depreciation and amortization (EBITDA) reveals that none of them are cheap. The measure helps to account for debt levels in evaluating a stock.

CAG EV / EBITDA TTM data by YCharts

ConAgra Foods, Inc. (NYSE:CAG) is the most expensive of the three companies above, and it’s not cheap enough to compensate for the execution risk. It’s a stock for the monitor list. The market may be in love with food stocks, but there is no excuse for not sticking to your valuation principles.

The article The 3 Big Risks in This Stock originally appeared on Fool.com and is written by Lee Samaha.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends McCormick. Lee is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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