CAG Preview: Private Label Packs a Crunch

ConAgra (CAG - commentary - Cramer's Take) obviously faces a number of very tough challenges in the short, intermediate and longer term:

• a secondary and tertiary brand portfolio during a time when private label is growing fast;
• very strong competition from Nestle and, to a lesser extent, Heinz (HNZ - commentary - Cramer's Take) in frozen meals; and
• less restaurant eating, which hurts volume in its commercial segment.

At the same time, with consensus EPS estimates of $1.44 and $1.56 for fiscal 2009 and 2010, respectively, the stock at $14.50 discounts a $21.50 stock price using the now 3% 30 year T- bond as a risk-free rate, a standard-for-staples 4% risk premium and no EPS growth in perpetuity.

Regarding the valuation, you could say that the 3% long bond is an anomaly that is below a normal rate and should not be used. That is an economic call and may be correct. On the positive side, you could dismiss the zero percent long-term EPS growth rate as being similar to many other beaten down consumer stocks, especially in the discretionary space. In effect, you might say that private label as a reflection of a stretched consumer could never get that bad. Thinking about private label for the whole consumer packaged goods group, I have two new thoughts.

First, Kroger (KR - commentary - Cramer's Take) management said on its latest earnings call that private label is now 34% of food unit sales. That compares with about 25% to 26%, I suspect, of total industry sales in the US. That is a pretty wide differential, which frankly surprised me. That industry number certainly seems likely to increase toward 34%, given Kroger's strong relative sales growth (past and projected).

Second, I thought of Aldi, the German hard discounter, which has been active in the U.S. for 15 to 20 years. Aldi sells only its own private-label products. The company's website announced that it is now the twenty-fifth largest food retailer in the U.S. and that it will grow square footage next year at 10%, faster than Wal-Mart (WMT - commentary - Cramer's Take) or Costco (COST - commentary - Cramer's Take), which have been the biggest takers of market share in food. Oh, and big private-label gains continue to happen in heavily advertised segments of the industry; it is a bad omen for ConAgra when the No. 1 branded guys are getting hit ever harder.

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At the time of publication, Thomas had no positions in the stocks mentioned.