CAG

Does ConAgra Brands (CAG) Have a Good Graham Number?

Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is √(22.5 * earnings per share * book value per share), which for ConAgra Brands gives us a fair price of $21.8. In comparison, the stock’s market price is $38.7 per share. Therefore, ConAgra Brands’s market price exceeds the upper bound that a prudent investor would pay for its shares by 77.5%.

The Graham number is often used in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor. The analysis also touches on the following points:

Sales Revenue Should Be No Less Than $100 million.

For ConAgra Brands, average sales revenue over the last few years has been $10,828,350,000, so according to the analysis the stock has impressive sales revenue.

Current Assets Should Be at Least Twice Current Liabilities.

We calculate ConAgra Brands's current ratio by dividing its total current assets of $3,033,700,000 by its total current liabilities of $3,518,800,000. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. ConAgra Brands’s current liabilities are actually greater than its current assets, since its current ratio is only 0.9.

The Company’s Long-term Debt Should Not Exceed its Net Current Assets

This means that its ratio of debt to net current assets should be 1 or less. Since ConAgra Brands’s debt ratio is -16.7, the company has negative current asset / liability balance. We calculate ConAgra Brands’s debt to net current assets ratio by dividing its total long term of debt of $8,088,200,000 by its current assets minus total current liabilities.

The Stock Should Have a Positive Level of Retained Earnings Over Several Years.

In ConAgra Brands’s case, the retained earnings have averaged $5,833,100,000 over the last 4 years. Retained earnings refer to the net income left for equity investors after all expenses have been accounted for, including dividends. It's a similar metric to free cash flow, with the difference being that earnings are calculated on an accrual, as opposed to a cash basis.

There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years.

ConAgra Brands has returned an average dividend yield of 3.0% over the last five years, and has been offering regular dividends since at least 1995.

The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 Years.

ConAgra Brands's earnings per share growth will be calculated using the average EPS of the years 2008, 2009, and 2010, and the average of the years 2020, 2021, and 2022. For the years starting in 2008, we have Eps values of $1.90, $2.15, and $1.37, which give us an average of $1.81. From 2020 to the present, we have EPS values of $1.72, $2.66, and $1.84, which average out to $2.07. The growth rate between the two averages is 14.36%, which falls short of Graham's 30% requirement while remaining positive.

In addition to trading far above its fair value, ConAgra Brands does not have the profile of a defensive stock according to Benjamin Graham's criteria because it has:

  • impressive sales revenue
  • a worrying current ratio
  • negative current asset / liability balance
  • a good record of retained earnings
  • a solid record of dividends
  • growing earnings per share
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

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