Which Stock Is a Buy in the Packaged-Foods Industry?

Zain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Food-packaging companies recently reported their earnings. The companies had hardly anything to surprise investors. However, sectors always come with investing themes and post-earnings release is a good time to find/discover them.

What was the common investing theme in the food-packaging industry? Let’s have a look at some of the players.

Investment thesis

Despite a +6% move since its earnings release on June 27, ConAgra Foods (NYSE: CAG) is only trading at 14.6x the company’s guidance for 2014. Thus, it remains the cheapest stock in the packaged-food universe. There are two potential drivers to long-term out-performance in the stock. First, the guidance of $2.40 for the year seems to be conservative and will likely be exceeded. Secondly, the Street is largely skeptical of ConAgra’s ability to grow EPS 10%+ a year between FY 2015 estimates and FY 2017 estimates.

However, there is not much reason to believe so, particularly for 2015 when many Ralcorp synergies kick in and Ralcorp fundamentals are likely to turn around (especially on easy comps). For those who haven’t been following ConAgra or in fact have heard this name the first time, ConAgra Foods acquired Ralcorp in January. At the time of acquisition, Ralcorp was one of the leading suppliers of private-brand packaged foods in North America. Adding Ralcorp has helped ConAgra to balance its portfolio and enhance its share in the packaged-food market.

Is McCormick an average stock?

Most of the analysts are neutral on McCormick (NYSE: MKC). The company reported non-GAAP EPS of $0.61. However, this should be $0.59, rather than $0.61, as the costs of the WAPC acquisition should be included. This aligns the numbers with how management will report them, especially regarding the full fiscal year (for which management expects to report within a range of $3.13 to$3.19). The estimate for 2013 goes to $3.15 from $3.18 and relies heavily on a strong fourth quarter for 2013.

Although McCormick continues to perform well with the North American consumer, a slower start to the grilling season could shave some revenue from 3Q 2013. The current Price/Earnings multiple of 21x is more than appropriate for a company that, though fundamentally strong, is growing EBITDA annually in the mid single-digit range. Most people now expect McCormick shares to perform roughly inline with the group for the rest of the year.

JPM recommends a hold stance in this stock

General Mills (NYSE: GIS) didn’t have much to surprise on its earnings release last Wednesday. Mills will be a solid and consistent ~7% EPS grower, plus it has a ~3% annual dividend yield. A 10% total shareholder return is not bad; however, it will not be wrong to say that there are slightly better options in other stocks in the same space. Still, Mills is recommended for investors who have longer time horizons (two-to-three years) and lower risk tolerances. For investors seeking potentially sizable earnings beats and/or multiple expansion, Mills may not necessarily be the most attractive option at this time.

Final word

There is one thing that is common in them – none of the companies are expected to be market out-performers in the near term. However, in the long-term, ConAgra seems the best option given its cheap valuations and synergies from Ralcorp. No surprises also means stability within the sector, which is adored by risk-averse investors.

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Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends McCormick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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