Conagra (CAG) Down 11.2% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Conagra Brands (CAG). Shares have lost about 11.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Conagra due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Conagra Q2 Earnings & Sales Top Estimates, Increase Y/Y

Conagra Brands which recently concluded the buyout of Pinnacle Foods, posted second-quarter fiscal 2019 results.

Earnings & Sales

Conagra’s quarterly adjusted earnings from continuing operations rose 21.8% to 67 cents, which surpassed the Zacks Consensus Estimate of 55 cents. The year-over-year upside was backed by reduced tax rate and increased operating profit, which compensated for escalated interest costs and higher share count.  

Conagra generated net sales of $2,383.7 million, which advanced 9.7% year over year and surpassed the Zacks Consensus Estimate of $2,322 million. Sales growth was driven by contributions from Pinnacle Foods, Angie's BOOMCHICKAPOP and Sandwich Bros. buyouts. On the contrary, divestitures of Trenton production facility weighed on sales growth.

Organic sales (excluding Trenton) slipped 1.6%, mainly due to last year’s hurricane-related impacts, partly made up by improved price/mix.

Gross Margin

Adjusted gross profit jumped 7.6% to $704 million, with adjusted gross margin expanding to 29.5%. The upside was backed by Pinnacle Foods’ inclusion along with productivity gains from supply chain and favorable pricing in the Legacy Conagra business. This was somewhat countered by elevated transportation and input costs, and higher retailer marketing investments in the Legacy Conagra business.  

Segmental Details

Grocery & Snacks: The segment’s quarterly sales came in at $900 million, which remained almost flat year over year. Notably, Angie's BOOMCHICKAPOP acquisition contributed nearly 180 basis points (bps) to net sales growth, which was offset by last year’s hurricane-related impacts. Organic sales dipped 1.9%, with volumes down 2.2%.

Refrigerated & Frozen: Net sales jumped 1.7% to $771 million, as Sandwich Bros.’ buyout contributed about 120 bps to net sales growth. Organic sales increased 0.5%. Markedly, volumes rose 0.5%, backed by focus on innovation in certain categories.

International: Net sales dropped 5.4% to $208 million, which was hurt by the divestiture of Canadian Del Monte business and adverse currency movements. This was somewhat compensated by benefits from the buyout of Angie's BOOMCHICKAPOP. On an organic basis, net sales jumped 3.9%, courtesy of 0.6% volume growth, which was backed by improved snacks business. Also, price/mix grew 3.3%.

Foodservice: The segment’s quarterly sales declined 16.5% year over year to $246 million, largely owing to Trenton facility’s sale. Organic sales declined 10.4% on account of last year’s hurricane-related effects. Volumes tumbled 12.9%, whereas price/mix rose 2.5%.

Pinnacle: Sales from this unit for the 31 day period between the acquisition and Conagra's quarter end, came in at $259 million. Sales were hurt by soft performances by several important brands and product recall on Duncan Hines.

Other Financial Fundamentals

Advertising and promotion (A&P) costs declined 19.4% to $69 million, as management continues to shift investments from A&P marketing to the aforementioned retailer investments in the Legacy Conagra business.

Conagra exited the quarter with cash and cash equivalents of $442.3 million, senior long-term debt (excluding current portion) of $11,349.5 million and total stockholders’ equity of $7,303.3 million. In the first half, the company generated net cash of $250.7 million from operating activities (continued operations).

During the quarter, Conagra paid quarterly dividend per share of 21.25 cents.

Outlook

Conagra reiterated the fiscal 2019 outlook for its Legacy business. Net sales are anticipated to increase 0.5-1.5%. Organic sales are expected to increase 1-2%, excluding the impacts from the sale of the Trenton facility.

Adjusted gross margin is expected to be 29.7-30%, while input cost inflation is guided between 3.0% and 3.2%. Management projects adjusted operating margin to be 15.0-15.3%. Adjusted effective tax rate is likely to be 23-24%.

Including the impacts from Pinnacle Foods’ acquisition, Conagra anticipates net sales to grow 22-23%. Organic sales growth is expected in the 1-2% range. Further, the company expects adjusted gross margin to be 29.3-29.6%, including Pinnacle Foods’ impact. Adjusted operating margin is likely to be 14.9-15.2%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -13.88% due to these changes.

VGM Scores

At this time, Conagra has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It’s no surprise Conagra has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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Source: Zacks



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