LONG ConAgra (CAG)/Rob Campagnino – Consumer Staples
Rob highlights his Long call in ConAgra (CAG), one of North America’s leading food companies serving both the Consumer and the Commercial markets. CAG has been making new highs in recent weeks, but Rob says it remains undervalued on a number of fronts.
Since 2008, it has consistently traded at about a 10%-15% discount to the consumer staples sector. CAG is close to finalizing its deal to acquire Ralcorp (RAH), a private-label food producer. The acquisition, which has cleared both US and Canadian regulatory hurdles, will be transformative allowing CAG to deleverage its operations, while building a higher earnings base.
Hedgeye’s Global Macro team sees a bubble building in commodities. Rob says CAG – already a strong player in its space – will be a major beneficiary when that bubble bursts, dramatically lowering its cost of inputs, and also mitigating the inventory issues RAH struggled with last year. In a nutshell: there is valuation support for higher prices right here; the company is on the brink of closing a transformative deal that will create significant synergies; CAG will benefit tremendously from what we see as the coming deleveraging of commodities.
Rob says the earnings base could nearly double as a result of these developments. We note the stock has a low Beta (0.47) and pays a $1 dividend, nearly 3%.