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ConAgra Foods, Inc. (CAG), Hershey Co (HSY): A Hidden Gem in the Food Industry

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Shares of ConAgra Foods, Inc. (NYSE:CAG) have advanced more than 35% in the past year. The company made a big splash during this span with the Ralcorp Holdings, Inc. (NYSE:RAH) acquisition and will now be the largest private-label food manufacturer in the United States. The run-up in shares should be encouraging to potential investors as the decade-long slump could give way to several years of out-performance and a re-rating in the shares. The stock is clearly the best value in the food space and could advance another 40% over the next two years.

ConAgra Foods, Inc. (NYSE:CAG)

Changing confidence

ConAgra Foods, Inc. (NYSE:CAG) just reported 4Q 2013 results that beat expectations. The main consumer-foods division posted positive volumes (+3%) for the first time in 11 quarters. Cost synergies related to the Ralcorp Holdings, Inc. (NYSE:RAH) acquisition have been increased by management. These favorable results were then expanded upon with a very upbeat assessment of growth in the coming years.

Management forecasts earnings-per-share advancing by at least 10% in each of the next four years. This is quite the conviction from a company that has had its struggles during the past decade. Analyst expectations are set at 12% growth for the next two years as it seems likely that this goal will prove conservative.

The company derives more than half of its sales from the consumer-foods segment, which includes brands such as Hunts, PAM, Banquet, Chef Boyardee, Healthy Choice, Orville Redenbacher, Reddi-Whip, and Marie Callender’s. The rest of the sales are derived from the commercial-foods division and Ralcorp Holdings, Inc. (NYSE:RAH).

ConAgra Foods, Inc. (NYSE:CAG) has always been known as a second-tier brand owner. Today is no different, but this fact is known by every analyst and is the main source of dislike with the stock. It is safe to say this situation is embedded in the stock price and the company’s lower margins are now more a source of upside potential.

Compelling valuation

ConAgra Foods, Inc. (NYSE:CAG) forecasts earnings per share of $2.40 and consensus expectations are at $2.42. This results in a forward price-to-earnings ratio of 14.7x. Now take a company that is viewed in a much more favorable light — Hershey Co (NYSE:HSY).

Hershey Co (NYSE:HSY) earned its reputation among investors thanks to years of consistent performance and a dominant market position in chocolate and confectionery products. The company also has EBITDA margins that are among the highest in the food industry at 20%. While this is good, it does make it unlikely that the company will expand meaningfully going forward. Despite all of this, management guided fiscal 2014 earnings per share to a range of $3.61 to $3.65. Using the high-end of that range results in a forward P/E ratio of 24.5x and growth of 13%. Now which looks like a better value?

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