Before Buying ConAgra, Read the Label

NEW YORK ( TheStreet) -- Packaged-food giant ConAgra ( CAG) will report fiscal first-quarter results on Thursday before markets open.

Investors want to know if now's the best time to check out ConAgra. Perhaps. But I suggest we first read the label.

While ConAgra, which recently acquired Ralcorp, continues to take decent strides to synergize both businesses, management has been unable to address eroding margins and poor organic growth. ConAgra recently lowered its fiscal 2014 earnings-per-share guidance by 2.5%. I don't believe we can continue to pretend that meaningful operational improvements are imminent.

To that end, even though the stock has been down by as much as 17% over the past month, I'm just not yet ready to apply ConAgra to my value diet. On Thursday, I don't believe there is anything management will say to alter the near-term view of the company. From a market reaction point of view, there likely won't be any negative surprises either.

The company has already "pre-announced" the important details of the quarter, including what amounts to a four-year plan. Last week the company lowered its full-year earnings-per-share expectations from a high of $2.40 to a range of $2.34 and $2.38 per share. While this does suggest as much as a 10% year-over-year improvement, very little of that growth is organic.

I've raised this point recently while discussing Campbell Soup Company ( CPB), which, like ConAgra, has struggled with "real growth" for quite some time. Bulls have long argued how this metric is exaggerated. But I disagree, especially given the nature of this sector and how quickly consolidations occur.

Organic growth, which measures a company's operational performance using only internal resources and excluding events like acquisitions, continues to be one of the best identifiable metrics (or "labels," if you will) when buying these stocks. Plus, it's anyone's guess when weak shipping volumes, which have also plagued (among others) Coca-Cola ( KO), are going to rebound.

Unlike PepsiCo ( PEP), which has navigated the weak volume environment with partnerships like Yum! Brands ( YUM) and the Doritos Locos Tacos of Taco Bell, ConAgra doesn't have that type of a card to play to offset what remains as challenging conditions. Management talked about steps that it's taking to improve sales performances. That's all well and good. But it assumes customers have suddenly been turned off by the company's many household brands including Swiss Miss, PAM and Healthy Choice.

If that were the case, deploying more sales and marketing efforts would be a great strategy. Even though ConAgra hasn't been a flawless executioner, I also believe the company's struggles are being affected just as much by macro weakness as it is by operational inefficiencies.

I won't go through the exercise of applying weight to this scale. But I believe that any overinvestment made by management to grow sales will only eat into the company's already weak earnings.

Let's not forget that first quarter non-GAAP earnings per share are expected to come in at 37 cents. This represents a 16% year-over-year decline. Given the company's history of eroding gross margins, investors should rethink applauding any efforts that increase expenses.

If it seems that I've being overly critical of ConAgra, it's completely unintentional. The truth is I love the brand. The stock, however, which has lagged its peers in the most important categories, including performance and returns on capital, is a completely different story.

Until management can post consecutive quarters of earnings and margin growth, I would recommend that investors stay away. You don't need to take my word for it -- just read the label.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

If you liked this article you might like

The Bottom? Not So Fast: Cramer's 'Mad Money' Recap (Tuesday 2/6/18)

The Bottom? Not So Fast: Cramer's 'Mad Money' Recap (Tuesday 2/6/18)

Activists Third Point, Jana Could Push for a Pinnacle Sale

Activists Third Point, Jana Could Push for a Pinnacle Sale

Stocks Close Higher as Wall Street Dissects New Tax Laws

Stocks Close Higher as Wall Street Dissects New Tax Laws

Stocks Trade Higher After Passage of U.S. Tax Law

Stocks Trade Higher After Passage of U.S. Tax Law

Stock Futures Point to a Higher Wall Street Open After Passage of U.S. Tax Law

Stock Futures Point to a Higher Wall Street Open After Passage of U.S. Tax Law