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Aramark or ConAgra: Which Food Stock is More Enticing Now?

The shift in consumer purchase decisions, evolving shopping behavior and increasing presence of small firms have been plaguing the food and beverage companies of late. With the entry of smaller companies in the market space, it is becoming difficult for the existing players to retain their position. Further, there has been a shift in consumer preference as they are more inclined toward the non-genetically modified, organic, and gluten free products. Also, deflationary pressure in commodities such as dairy, beef and eggs are hurting the margins of food companies. The recent news of e-Commerce king Amazon.com, Inc. AMZN acquiring the natural and organic foods supermarket chain Whole Foods Market Inc. WFM has further made competitors skeptical and raised concerns.

Even though food companies are making aggressive efforts and channeling funds toward product and packaging innovation along with existing products’ reformulation with more nutritional benefits, headwinds like food deflation, stiff competition, and an aggressive promotional environment are expected to be major deterrents in the near term.

Having said that, let’s try to ascertain which of these two key food players – Aramark ARMK and ConAgra Brands, Inc. CAG, presently make for a better investment option.

Zacks Rank

Both stocks carry a Zacks Rank #3 (Hold), which highlights the fact that these are likely to perform in line with the broader market over the next one to three months, as per our proprietary Zacks Rank that is designed to predict price movements over the said time frame. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Market Capitalization

Aramark’s market capitalization is $9.70 billion, while that of ConAgra is $14.07 billion. Going by its business size, ConAgra is better positioned over the long term owing to its massive scale of operations.

Surprise History

Chicago, IL-based ConAgra has delivered positive earnings surprise in four out of the last seven quarters. We believe divestment of the low-margin generating J.W. Swank and Spicetec Flavors & Seasonings businesses (in Jul 2016), as well as the successful spin-off of the Wesson brand are likely to boost the company’s profitability, moving ahead. Also, Conagra’s volume strategy, favorable pricing, supply-chain productivity, increased share repurchase, lowered interest expenses owing to reduced debt burden and higher profitability accrued from the Ardent Mills joint-venture business are expected to boost the company’s earnings in the near term.

However, international operations expose the company to several economic, political and environmental headwinds. We also believe that headwinds such as stiff industry rivalry or price inflation of major inputs, such as soybeans, pork, oats, beef, poultry, wheat, and corn, might dent the company’s profitability, going ahead. Notably, the company has reported negative sales surprise in five of the last seven quarters.

On the other hand, Philadelphia-based Aramark has been witnessing strong, broad-based productivity improvements in North America and International base accounts. It has also been reinvesting in technology and capabilities. Also, the provider of food, facilities and uniform services has delivered positive earnings surprise in six out of the seven consecutive quarters, along with in-line results in the remaining one. It has also posted positive sales surprise in four of the seven consecutive quarters.

VGM Score

We note that the VGM Score is a comprehensive tool that will allow investors to filter through the standard scoring system and choose better winning stocks. In order to screen out potential winning stocks, we consider only those that have a Zacks Rank #1 or 2 (Buy) and a VGM Score of ‘A’ or ‘B’. However, if we consider stocks with a Zacks Rank #3, we should opt for a better grade.

In that case, Aramark seems to outpace ConAgra on VGM Score as well, as Aramark’s score of ‘A’ is favorable than ConAgra Brands’ VGM Score of ‘C’. Hence, we should consider it a favorable investing option.

Price Performance

While shares of ConAgra have underperformed the Zacks categorized Food-Miscellaneous/Diversified industry, those of Aramark have significantly outpaced the sub-industry. While shares of Aramark have moved up 19.1%, ConAgra Brands’ stock has declined 13.3% over the last six months. The industry has declined 5.3% in the said time frame.

 

Estimate Revisions

Upward estimate revisions are indicative of positive investor sentiment about a stock. The Zacks Consensus Estimate for Aramark has remained stable for fiscal 2017 and fiscal 2018 over the last 30 days. On the other hand, the Zacks Consensus Estimate for ConAgra for fiscal 2018 and fiscal 2019 have declined 0.5% and 2.4%, respectively over the last 30 days, rendering a doubt on the stock.

Aramark’s earnings for the fiscal 2017 and fiscal 2018 are expected to grow by 12.9% and 13.3%, respectively. The growth rate is however lower in the case of ConAgra Brands, where earnings per share are projected to increase 8.2% and 8.5% for the next two fiscal years.

The above arguments clearly state that Aramark is better placed currently and should offer great value to investors.

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Amazon.com, Inc. (AMZN): Free Stock Analysis Report
 
ConAgra Foods Inc. (CAG): Free Stock Analysis Report
 
Aramark (ARMK): Free Stock Analysis Report
 
Whole Foods Market, Inc. (WFM): Free Stock Analysis Report
 
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