Although the S&P 500 is down 2.1% over the past six months, Conagra’s stock price has fallen further to $15.60, losing shareholders 16.6% of their capital. This might have investors contemplating their next move.
Is now the time to buy Conagra, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Conagra Will Underperform?
Even with the cheaper entry price, we don't have much confidence in Conagra. Here are three reasons why CAG doesn't excite us and a stock we'd rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
Conagra’s average quarterly sales volumes have shrunk by 1.5% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Conagra, its EPS declined by 13.8% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Conagra’s margin dropped by 4.8 percentage points over the last year. This decrease warrants extra caution because Conagra failed to grow its revenue organically. Its cash profitability could decay further if it tries to reignite growth through investments.
Final Judgment
We see the value of companies helping consumers, but in the case of Conagra, we’re out. Following the recent decline, the stock trades at 9.2× forward P/E (or $15.60 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at the most dominant software business in the world.
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