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How Does Conagra Brands's (NYSE:CAG) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Conagra Brands (NYSE:CAG) shares have had a really impressive month, gaining 34%, after some slippage. Unfortunately, the full year gain of 9.1% wasn't so sweet.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for Conagra Brands

Does Conagra Brands Have A Relatively High Or Low P/E For Its Industry?

Conagra Brands has a P/E ratio of 20.61. As you can see below Conagra Brands has a P/E ratio that is fairly close for the average for the food industry, which is 20.6.

NYSE:CAG Price Estimation Relative to Market April 11th 2020

That indicates that the market expects Conagra Brands will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Conagra Brands saw earnings per share improve by 6.3% last year. And its annual EPS growth rate over 5 years is 42%.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

So What Does Conagra Brands's Balance Sheet Tell Us?

Conagra Brands has net debt worth 62% of its market capitalization. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On Conagra Brands's P/E Ratio

Conagra Brands has a P/E of 20.6. That's higher than the average in its market, which is 14.0. With meaningful debt and only modest recent earnings growth, the market is either expecting reliable long-term growth, or a near-term improvement. What we know for sure is that investors have become much more excited about Conagra Brands recently, since they have pushed its P/E ratio from 15.3 to 20.6 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Conagra Brands may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.