Citigroup is downgrading
ConAgra (
NYSE:CAG) to Hold from Buy and removing it from their Top Picks Live list.
What's Happened? — On Tuesday (6/9) ConAgra’s Slim Jim manufacturing plant in Garner, NC exploded killing three people. On Saturday (6/13), the local news paper indicated that the ATF has ruled the explosion an accident caused by a natural gas leak. ConAgra has not commented on the situation.
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Extensive Damage Done — The plant was extensively damaged and will likely be off-line for quite a long time and is the only plant that makes Slim Jim. Citigroup est. revenues of Slim Jim at $200 mm/yr and EPS contribution at $0.06/sh.
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Insurance Coverage is Unknown — ConAgra has not yet made any comments regarding its insurance coverage on the plant; nor its coverage with regards to business interruption insurance. Given that the ATF has said that it was a gas leak, Citigroup worries that the company’s insurance may not cover the cost of the damage to the facility, which will likely amount to tens of millions.
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Worst Case — The worst case is that CAG loses op. profits from Slim Jim for a year, amounting to -$0.06 to EPS. Additionally, there will likely be lawsuits related to the deaths and others who were injured. Lastly, the cost to repair the facility may not be covered by the insurance.
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Conclusion — Citigroup is downgrading CAG to Hold, as they don't see any positives coming out of this situation. They believe that 4Q09, ended May '09, will show strong momentum, but believe that the loss of Slim Jim will create unanticipated difficulties for F2010 that has reduced theirvisibility on F10 & F11 EPS. Firm's price target goes to $21 (-$4) and F11 EPS is reduced to 1.72.
Notablecalls: I think this call will cause some downside in the stock:
- Citi's Packaged Foods team is pretty highly regarded among the investor community.
- The stock is removed from Citi's Top Picks Live list which means there will be some selling pressure from the longs.
- The one time nature of the event that caused the downgrade may lure some traders to play the bounce. Some things that look too obvious tend to end up quite the opposite. CAG may end up being a perfect example.
I'm guessing 1-1.5pts of downside may be in store.
