One of the big movers in today’s trading session is ConAgra Foods Inc. (NYSE:CAG) which has lost 7.34% to $30.44 as at 2:07PM EDT. ConAgra with its market capitalization of $12.73B is a packaged food company. The Company operates in four segments: Consumer Foods, Commercial Foods, Ralcorp Food Group, and Ralcorp Frozen Bakery Products. The company owns recognized brands such as Banquet, Chef Boyarde, Egg Beaters, Healthy Choice, Hebrew National, Hunt’s, and Marie Callender’s among others.
Why Did Shares of ConAgra Tank Today?
You will be interested in knowing that ConAgra has 3 reporting segments (Consumer Foods, Commercial Foods and Private Brands) with the Consumer Foods segment accounting 41.1% of total revenue in the first half of 2014 while the Commercial Foods and Private Brands segments accounted 34.9% and 24.0% of revenue respectively.
ConAgra started out on the path to a decline in the share price after it announced that Q4 2014 earnings will be below prior expectations because of disappointing Consumer Foods volume performance. The quarterly volume of the Consumer Foods segment fell by 7% while the Private Brands segment reported weak profits. According to the preliminary announcement (details are expected on June 26), fourth quarter EPS is expected at $0.55 down from the prior guidance of “slightly above $0.60”.
Why the Market Will Continue Selling Shares of ConAgra
ConAgra has had the dark cloud of a potential sell-off hovering over its head over the last couple of months as the stock declined 15.86% from an open of $33.66 to $28.32 in the first two months of the year. The stock has managed to claw back some gains, but it has not been able to touch its 52-week high of $37.28 in the last six months.
Many people will erroneously assume that the share price will not fall when the company announces Q4 2014 earnings on June 26 or that the decline in share price will be priced in. However, highlighted below are some other reasons why the share price will continue to fall and how you can make profit from buying put options or by writing covered calls.
Continued Inability to Restore Private Brands
The continued inability of ConAgra to restore its Private Brands segment to a decent operating profit level is one of the reasons the share price will continue to fall. For one, low margins of the segment affected the revenue negatively in the last reported quarter and the company has announced that we can expect more impairment when it announces the fourth quarter result on June 26.
- Weak Lamb Weston Potato Business
ConAgra is yet to recover from the loss of an important customer of its Lamb Weston potato business in 2013. In the third quarter, contribution from the business was low, leading to an 8% year-over-year drop in the profit of the Commercial Foods segment. I anticipate that the situation with the potato business has not improved and has probably worsened and we can expect to hear the confirmation on June 26.
- Increase in the Price of Raw Materials
ConAgra’s raw materials such as corn, wheat, beef, poultry and pork are subject to market fluctuations and the recent market fluctuation has been causing an increase in their prices. The drought in some parts of the U.S has affected beef production leading to an increase in the price of beef. Rising prices of beef is causing consumers to change their tastes to poultry and pork. An increase in the demand for pork and poultry will also cause their prices to rise. ConAgra cannot afford to increase the prices of its offerings if its wants to keep its customers; hence, the company will be forced to operate at lower margins until this situation blows over.
How to Trade CAG Options
I anticipate a much steeper drop in the share price of ConAgra when it releases its fourth quarter results; hence, I am going with put options. I recommend the CAG Jan 2015 29.000 put (CAG150117P00029000).
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