On Dec 26, we issued an updated research report on premium consumer goods company Conagra Brands, Inc. CAG.
Existing Scenario
Over the last three months, shares of this Zacks Rank #3 (Hold) company yielded a return of 14.9%, outperforming 6.8% growth recorded by the industry.
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The company reported better-than-expected results for second-quarter fiscal 2018 (ended Nov 30, 2017).
Conagra’s net sales were up 4.1% and organic sales improved 2.3% in the fiscal second quarter fiscal, both on a year-over-year basis. The upside was driven by elevated sales of the company’s renowned branded products such as Healthy Choice, Marie Callender, Slim Jim, Duke's, Bigs and Frontera. Moreover, favorable price-mix, product-mix and customer-mix boosted the quarterly top-line results. The company also noted that amid margin pressure, its adjusted earnings had improved year over year during the quarter, primarily on the back of stronger top-line performance. We believe these positives will continue to bolster Conagra’s results in the quarters ahead.
Also, Conagra consistently restructures its product portfolio through disciplined mergers & acquisitions, and major divestitures. For instance, the divestiture of J.W. Swank and Spicetec Flavors & Seasonings businesses (July 2016) has been stoking its top-line growth. Notably, Conagra expects that the Wesson brand’s spin-off (May 2017) will also complement its portfolio-restructuring strategy. On the other hand, the Angie's Artisan Treats, LLC acquisition (October 2017) as well as the latest Sandwich Bros. acquisition (December 2017) are anticipated to drive the company’s revenues in the near term.
Further, Conagra is highly committed toward its shareholders and intends to provide adequate returns on the back of dividends and share buyback offers. During the fiscal second quarter, the company repurchased roughly 8 million shares for $280 million. Conagra is on track with its motto to buy back shares worth $1.1 billion in fiscal 2018.
However, prices of various raw inputs used by Conagra are highly sensitive to demand and supply imbalances, as well as changes in government’s agricultural policies. Input price inflation often hurts the company’s margins by remarkably flaring up its raw material, packaging, energy and operational costs. For instance, in the recently-reported quarter, Conagra’s gross profit margin contracted 100 basis points year over year. The company stated that this downside largely stemmed from price inflation of certain major inputs, including animal proteins, dairy and oils. The company predicts that it will experience roughly 3.7% cost inflation in fiscal 2018 (higher than 3.3% predicted in the preceding quarter).
Conagra also mentioned that tropical hurricanes during the fiscal second quarter adversely affected its revenue-generating and profit-making prospects. The company noted that consumer pantry stocking and warehousing activities had significantly increased during the quarter (especially across grocery and snaking businesses) due to these hurricanes. This would result in sales decline in the upcoming quarters. Furthermore, these environmental hazards escalated the company’s warehousing and transportation expenses, in turn hurting operating margins.
In addition to the above, Conagra conducts its business in a highly competitive industry. Intense competition increases the bargaining power of consumers and exposes the company to risks of market-share loss. Moreover, in order to increase or retain demand from prospective end users, Conagra not only needs to ensure good product quality and prices but also has to maintain greater corporate transparency by ascertaining health and wellness aspects of products. Maintaining the desired level of transparency often becomes challenging for the company.
Other Stocks to Consider
Some other top-ranked stocks in the same space are listed below:
Greencore Grp GNCGY currently sports a Zacks Rank of 1 (Strong Buy). The company’s earnings per share (EPS) are projected to be up 8.90% in the next three to five years. You can see the complete list of today’s Zacks #1 Rank stocks here.
Flowers Foods, Inc. FLO holds a Zacks Rank of 2 (Buy). The company’s EPS is estimated to rise 6.10% over the next three to five years.
Lamb Weston Holdings Inc. LW also carries a Zacks Rank of 2. The company’s EPS is estimated to be up 5.70% during the same time frame.
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