Conagra Brands, Inc. (NYSE:CAG) shares are down more than -11.91% this year and recently increased 0.11% or $0.04 to settle at $34.84. Campbell Soup Company (NYSE:CPB), on the other hand, is down -21.83% year to date as of 11/13/2017. It currently trades at $47.27 and has returned 4.05% during the past week.
Conagra Brands, Inc. (NYSE:CAG) and Campbell Soup Company (NYSE:CPB) are the two most active stocks in the Processed & Packaged Goods industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CAG to grow earnings at a 12.06% annual rate over the next 5 years. Comparatively, CPB is expected to grow at a 3.21% annual rate. All else equal, CAG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 21.84% for Campbell Soup Company (CPB). CAG’s ROI is 9.60% while CPB has a ROI of 19.20%. The interpretation is that CPB’s business generates a higher return on investment than CAG’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CAG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.02. Comparatively, CPB’s free cash flow per share was +0.10. On a percent-of-sales basis, CAG’s free cash flow was 0.1% while CPB converted 0.38% of its revenues into cash flow. This means that, for a given level of sales, CPB is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CAG has a current ratio of 1.00 compared to 0.80 for CPB. This means that CAG can more easily cover its most immediate liabilities over the next twelve months. CAG’s debt-to-equity ratio is 0.87 versus a D/E of 2.16 for CPB. CPB is therefore the more solvent of the two companies, and has lower financial risk.
CAG trades at a forward P/E of 17.06, a P/B of 3.81, and a P/S of 1.87, compared to a forward P/E of 14.94, a P/B of 8.72, and a P/S of 1.73 for CPB. CAG is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CAG is currently priced at a -12.11% to its one-year price target of 39.64. Comparatively, CPB is -5.06% relative to its price target of 49.79. This suggests that CAG is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for CAG and 3.20 for CPB, which implies that analysts are more bullish on the outlook for CPB.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CAG has a beta of 0.33 and CPB’s beta is 0.40. CAG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.CAG has a short ratio of 4.39 compared to a short interest of 9.20 for CPB. This implies that the market is currently less bearish on the outlook for CAG.
Conagra Brands, Inc. (NYSE:CAG) beats Campbell Soup Company (NYSE:CPB) on a total of 8 of the 14 factors compared between the two stocks. CAG is growing fastly, higher liquidity and has lower financial risk. CAG is more undervalued relative to its price target. Finally, CAG has better sentiment signals based on short interest.