This will just a quick investment diary update to track my thoughts (or lack thereof) on an investment for future evaluation. So, I’m long Conagra Brands (“CAG”) with about a $33 cost basis.
At the time of my investment (a few months back), I was not maintaining a diary such as this so I am forced to rely on my very fallible memory for the reasons I bought the stock.
First, I like management. Sean Connolly was CEO of Sara Lee and first sold off the coffee operations to a coffee rollup owned by the Reiman family/ J.A. Bensicker, working with Bart Becht et. al.; revamped Hillshire Farms and Jimmy Dean and other sort of tired brands and sold them to Tyson for a huge premium (after a bidding war). I will say he tried to buy Pinnacle Foods first, which cost shareholders a few hundred million in break-up fees, but it prompted bidders to get off the sideline, so that is a push.
Second, Jana Partners is a large shareholder so there is an engaged equity owner paying attention to what goes on at the company; reducing principal/agent conflicts. In addition, I like the CPG industry as it has been one of the best in the history of the planet as far as sustainable ROICs. I think it remains an area where consumers do not like to experiment a lot and brand signaling and the related reductions in searching costs retains a lot of value.
The industry is under some elevated scrutiny from investors because Millennials appear to be less brand loyal and prefer fresher foods. I personally believe this trend will revert somewhat, as Millennials form families and experience the strains which raising a family places on time (for meal prep and searching costs to scout out new brands) and budgets (I’m making an avocado toast bear market call).
I do not have to have much conviction in my predictive powers. The market valuation of the industry, however, appears to be discounting a continuation of current trends (as Mr. Market generally does). My entry point was at around a 12x EV/EBIT based upon management projections (there are a lot of moving parts in the financials due to spin off of Lamb Weston and other transactions). So basically, the financials are messy, I like management and am giving their projections the benefit of the doubt. I am operating on the thesis that “if you buy it cheap, something good might happen.”
CAG just provided a strategy update at the CAGNY conference a consumer food/staples investment conference. Here’s a link to the page where you can download the slide deck.
Going through the deck I had a few more thoughts. I noticed they have some statistics indicating that Millennials are more likely to purchase frozen meals after they have kids and are even more likely to do so once the kids are over 6 years of age. That makes a lot of sense to me.
In addition, I like the updating they are doing with many of their brands. I also noted they are introducing more vegetarian and vegan options to get more on trend. They have introduced a number of bowls, under the various frozen food brands. Connolly had great success introducing bowls under the Jimmy Dean brand back at Sara Lee/Hillshire, if memory serves.
On a sort of related point, they are reintroducing Tennessee Pride sausages, rolling out several breakfast offerings that also hearken back to the Jimmy Dean playbook. Connolly has given some interesting interviews on restoring and maintaining brand equities. It looks like they are rolling out throwback offerings for some of the older brands (like Chef Boyardee).
One sort of concerning thing is the discussion about acquisitions. Acquisitions always introduce more risks in my opinion. The vast majority of them are failures, from the standpoint of an investor in the acquirer. Previously Connolly agreed to pay what was viewed as a high price to acquire Pinnacle Foods, which was assembled by private equity guys (when an industry guy buys from a finance guy, it seems usually the industry guy is getting fleeced by the financier).
He did, however, switch from buyer to seller without putting up much of a fight. Also, I think Jana is on record as saying they will be buyers or sellers based on the pricing. If there wasn’t an equity holder voice in the boardroom, I would not be long CAG.
For now, however, I like the combination of Connolly’s execution and vision with the financial discipline imposed by having an active equity investor in the boardroom.