ConAgra Shares Are Up 40%, But They're Still Tasty

Apart from perhaps pawnbrokers and repo men, no one much likes a recession, but it hasn't been all bad for packaged-food companies. Just take a look at Omaha, Neb.-based ConAgra Foods (CAG), which served up one of Wall Street's most savory meals Monday: a beat-and-raise quarter.ConAgra, whose brands include Chef Boyardee pastas, Peter Pan peanut butter and Slim Jim, um, meat-like sticks, said fiscal second-quarter profit jumped 43%, eclipsing analysts' average estimate by a nifty nickel a share. The recession not only has folks eating more meals at home; it's caused commodity prices to drop from year-ago levels -- a boon to food companies like ConAgra.

%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% The stock popped more than 4% Tuesday and is now up about 40% for the year, but it still looks like a bargain -- and not just on account of the crummy economy. ConAgra's new bosses have done an admirable job of making the place a lean, mean, packaged-food machine, writes Citigroup (C) analyst David Driscoll, who rates shares at buy.

"ConAgra appears poised for earnings growth near the top end of the packaged food group over the next several years, owing to the significant cost reduction opportunities afforded to the firm from its previously inefficient structure," Driscoll says. "We agree with the company's strategy and think that the new management team is a first-class group, assembled from among the best consumer packaged good companies, and has the capability to drive real improvements at ConAgra."

At 12 times forward earnings, the stock offers a discount of more than 30% to the S&P 500 ($INX) and more than 20% to its own five-year average, according to Thomson Reuters. (Shares are similarly cheap on a trailing earnings basis.) Perhaps most interesting is the price-earnings-to-growth (PEG) ratio, which measures how fast a stock is rising relative to its growth prospects. ConAgra is beating the S&P by 15 percentage points in 2009 and yet its PEG still offers nearly a 25% discount to the broader market. It's trading at about a 30% discount to its own five-year average PEG, too.

All in all, that looks like a tasty relative valuation. Meanwhile, analysts' average price target stands at $25.10. Throw in the generous 3.7% dividend yield and you get an implied return of nearly 12% in the next year or so.

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