This Snack-Food Company Is Priced for Free Fall

GLP-1s are reshaping vast portions of the economy...

Most folks know drugs like Ozempic and Zepbound are transforming the health care industry, which accounts for 16% of the U.S. GDP.

However, their disruptive impact doesn't stop there. GLP-1s fundamentally alter how people eat and how many calories they take into their bodies.

And those changes are disrupting entire industries... from packaged snacks and baked goods to restaurants and other consumer staples.

In short, if it thrives on indulgence and overeating, it's being threatened by GLP-1 drugs. That doesn't mean we should wave goodbye to snack foods, though...

As we'll discuss today, companies operating in these industries aren't sitting idly by while GLP-1s disrupt their markets. And that's creating opportunity as investors underestimate these potential victims.

Folks are turning their back on 'big food' companies and their snacks...

To understand the full story, you need a basic idea of how GLP-1s work.

Ozempic and drugs like it use an active ingredient that replicates a hormone called "glucagon-like peptide-1," or GLP-1. This hormone slows down digestion and makes the brain feel full.

GLP-1 users aren't just eating less – they're also eating differently. While these drugs suppress appetite, they also change food preferences. Many patients report losing interest in the ultra-processed foods and packaged snacks they once enjoyed.

Around 7 million people now use these drugs in the U.S. And according to Morgan Stanley, this figure could jump to 24 million by 2035... or 12% growth per year.

That's far fewer customers for "big food" companies each year, especially the ones that focus solely on junk foods.

Conagra Brands (CAG) is one potential victim of this life-changing drug...

Conagra owns familiar brands like Marie Callender's, Duncan Hines, Slim Jim, Reddi-Wip, and many others.

And now, with the rise of GLP-1 drugs disrupting traditional eating habits, investors are bracing for an impact.

We can see this by looking at Conagra's Uniform price-to-book (P/B) ratio...

The Uniform P/B ratio compares a company's total value with the value of the assets on its balance sheet (or "book"). The higher the P/B ratio, the more investors are willing to pay for its assets.

Said another way, it measures how valuable investors think Conagra's assets are.

GLP-1 drugs started to gain popularity in 2022. Before that, Conagra's Uniform P/B ratio was in an uptrend... surging from 5 times to 5.7 times.

Then the free fall started. Uniform P/B is down an expected 44% in four years, to 3.2 times for fiscal year 2025. (Conagra's fiscal year ends in May.)

Take a look...

This is the lowest valuation Conagra has seen since 2015, when the company spun off lower-return parts of the business to ramp up profitability.

As you can see, investors are highly concerned about Conagra's future...

And while they're right that GLP-1s pose a threat to the business, they might be too pessimistic.

Conagra and its peers have survived many changes in dietary trends. They've managed to adapt over the decades.

It's not as if Conagra has no healthier options, either. Brands like Birds Eye, Healthy Choice, and Angie's won't be eliminated by GLP-1 drugs.

These healthier options might even see higher demand from here on out. And the company will keep innovating to address evolving consumer needs.

The current health-focused trend is strong. It's set to change the established realities of several industries. That doesn't mean a company like Conagra will accept its fate and disappear year by year.

Regards,

Joel Litman
December 16, 2024