Packaged goods producer ConAgra Foods, Inc. CAG is scheduled to report third-quarter fiscal 2015 results before the opening bell on Mar 26. With a positive average surprise beat of 2.81% in the last four trailing quarters, the company reported a 0.00% earnings surprise in the preceding quarter. Let’s see how things are shaping up prior to the earnings announcement.
Factors to Influence Q3 Results
ConAgra recently lowered its EPS outlook for fiscal 2015, on grounds of strengthening dollar and waning Private Brand business. Previously, ConAgra forecasted mid-single digit growth rate in EPS, but has lately revised it to a range of $2.13–$2.18. The company expects to generate EPS below 10 cents in the to-be-reported quarter, as against 62 cents earned at the end of third-quarter fiscal 2014.
Devaluation of dollar is primarily responsible for ConAgra’s lower EPS outlook. This is because strengthening of dollar has caused a higher-than-anticipated mark-to-market loss from certain commodity index hedges, as stated by the company in its last earnings release.
Further, two operational issues have been troubling ConAgra’s business lately. The company is witnessing a constant longshoremen labor dispute on the U.S. West Coast. The disagreement will likely mar the benefits reaped from the exports of Lamb Weston potato items in foreign markets.
The margins, prices and volumes of the company’s Private Brands segment are experiencing softness, due to a competitive bidding environment and execution deficits. The strategic initiatives undertaken to encounter these issues are not expected to bear fruit until fiscal 2016.
Nevertheless, ConAgra perceives fiscal 2015 as a year of recovery and stabilization for its business. The company expects the Consumer Foods and Commercial Foods segments to accrue higher margins and sales in third-quarter fiscal 2015, backed by superior cost-saving initiatives. However, we feel that weakening performance of Private Brands, workforce disputes and dollar evaluation are issues that might cause the stock to miss estimates in third-quarter 2015.
Earnings Whispers
Our proven model does not conclusively show that ConAgra is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. That is not the case here as we will see below.
Zacks ESP: ConAgra currently has an Earnings ESP of -1.89%. This is because the Zacks Consensus Estimate of 53 cents stands above the Most Accurate estimate of 52 cents.
Zacks Rank: ConAgra’s Zacks Rank #4, when combined with a -1.89% ESP, predicts an earnings miss. We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revision momentum.
Stocks to Consider
Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
AMC Entertainment Holdings, Inc. AMC with an Earnings ESP of +100% and a Zacks Rank #2.
Cinemark Holdings Inc. CNK with an Earnings ESP of +2.86% and a Zacks Rank #2.
G-III Apparel Group, Ltd. GIII with an Earnings ESP of +2.41% and a Zacks Rank #2.
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