Jim Cramer’s Pick: ConAgra Vs. Kellogg
“If you’re looking for safety — and after a day like today, everybody should be searching for a safe-haven — I would buy ConAgra,” he said. “Not only that, but if I were still at my hedge fund, I’d make this a pairs trade, going long ConAgra and shorting Kellogg in order to bet that CAG will outperform K for the foreseeable future.”
Although the company may not be a household name, ConAgra’s products can be found in an estimated 97 of American households. Its brands include Egg Beaters, Healthy Choice, Hunt’s, Orville Redenbacher, PAM and Hebrew National, among others.
Cramer said that the company has always faced a headwind in commodity costs, which could take a big bite out of its bottom line.
But now, things are different.
“Everything from the ingredients ConAgra uses to make its food, to the paper and plastic it uses to package the stuff, has become cheaper, and that should be a huge boon to the company’s gross margin — what ConAgra makes in profit off of every dollar of sales,” Cramer said. “Just as ConAgra was the biggest loser as commodity prices edged endlessly higher, it will be the biggest winner now that those same commodities have come crashing down.”
But the company’s good fortunes aren’t a matter of luck.
Cramer noted that amid high costs last spring, ConAgra’s management developed a strategy to promote growth that is now paying off.
“At the end of the day, this is the difference between ConAgra and Kellogg: ConAgra has a plan, while Kellogg seems to simply be putting out fires as they crop up,” he said.
Things have been so lackluster for Kellog that Cramer revealed that he was “seriously considering” CEO John Bryant as the next candidate for the Mad Money Wall of Shame.
A year-over-year sales decline of 1.3 percent in the first quarter, a cut in full-year guidance, reduced buyback and shrinking market share – due in part to price increases – have hurt Kellogg.
Meanwhile, ConAgra reported a stellar quarter last week, posting a 6 percent increase in sales despite a 5 percent decline in volumes, projecting EPS growth 6 to 8 percent and having $780 million left in their buyback authorization, equal to about 7.5 percent of market cap.
All that, and a higher yield — 3.8 percent vs. 3.5 percent for Kellogg.
Cramer called it a case of “classic UPOD — under-promise, over-deliver.”
The reasons for ConAgra’s success include the strength of Lamb Weston, ConAgra’s frozen potato business; profitable acquisitions such as National Pretzel and Del Monte Canada, and its move into “making knock-off store brand foods for supermarkets,” he said.
“In fact, ConAgra has a lot of value brands, something CEO Gary Rodken mentioned on the conference call when he talked about our being in a ‘leftovers’ economy,” Cramer said. “This is a company that understands what the consumer wants, and that’s why they’re leaving Kellogg in the dust.”
Cramer concluded by saying that ConAgra was “in the early innings of a miraculous turn. Now if only they could come up with a Hebrew National SlimJim, then we'd know they've got a real miracle going.”
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