Conagra Brands Inc Stock Is the Best of a Beleaguered Bunch

Advertisement

CAG stock - Conagra Brands Inc Stock Is the Best of a Beleaguered Bunch

Source: Shutterstock

When General Mills, Inc. (NYSE:GIS) posted a less-than-thrilling fiscal third quarter report last week, it didn’t take long for investors to extrapolate its woes and assume they applied to rival players like Conagra Brands Inc (NYSE:CAG), Kellogg Company (NYSE:K) and J M Smucker Co (NYSE:SJM) as well.

CAG stock fell nearly 3% on General Mills’ inflation woes, while Kellogg shares fell more than 4%.

As it turns out, though, CAG stock holders need not have worried. Conagra’s recently completed fiscal third quarter indicated it was steering clear of cost problems much better than at least one of its rivals was. Indeed, this food name may be emerging as an investment-worthy bright spot in an otherwise troubled industry.

Conagra Controls Costs

As a reminder, General Mills managed to beef up its top line to the tune of 2% last quarter. But after adjusting for currency fluctuation (and stripping out the impact of new tax laws), operating profits fell 6%. Higher shipping costs and greater commodity-input costs took a sizable toll.

Conagra Brands faced the exact same headwinds last quarter, to be fair. It just handled them much better, successfully culling costs in other ways and on other fronts.

Namely, it backed off on advertising and promotional costs — by almost 14% — and lowered its selling and general administration expenses by roughly 6%. That was enough to offset the 3.7% increase in ingredients, packaging and shipping costs.

All told, Conagra turned $1.99 billion in sales into a non-GAAP profit of 61 cents per share. That topped estimates for a bottom line of 56 cents per share and revenue of $1.98 billion. And, it was enough to top the prior year’s Q3 earnings of 48 cents per share despite mostly flat sales.

CEO Sean Connolly said of the company’s Q3 numbers:

“I continue to be pleased with the progress we are making on improving our fundamentals, particularly on the top line. Our efforts are paying off, and our businesses are gaining momentum. Our frozen portfolio, where we put most of our innovation focus this year, continues to show strong growth and share gains. Consumption in our Grocery & Snacks segment also continues to strengthen, and non-promoted consumption exceeded expectations in the quarter.”

New and Improved

The results suggest a rebuilding effort from Conagra is taking root.

Connolly took the helm in April 2015, largely charged with revitalizing the struggling company, which owns brand names ranging from Reddi-Wip, to Hunt’s tomatoes, to Peter Pan peanut butter, and more.

One of the decisions as part of that effort was the exit of its private-label business — an arena that’s been increasingly competitive and doesn’t exactly play into the company’s strengths. Other turnaround initiatives include new products and specialty products in particular (even if it meant acquiring a smaller player with a hot product).

The reconfiguration appears to be paying off for CAG stock holders, even if the work isn’t done yet.

As well-known market commentator Jim Cramer put it after the company’s third quarter numbers were released, “this ConAgra is a new ConAgra and I really like them.” He was also willing to make the stark comparison to General Mills, saying “If you contrast [ConAgra] vs. General Mills you’re going to be shocked at how good they are.”

Bottom Line for CAG Stock

Connolly also commented during last week’s earnings report:

“Overall, our transformation plan remains squarely on track. We continue to invest to drive brand saliency, enhanced distribution, and consumer trial in the face of higher inflation on input and transportation costs, which is pressuring near-term margins. Strong underlying trends are enabling us to increase our fiscal 2018 adjusted EPS guidance above the range provided at the CAGNY conference in February, which already accounted for the impact of tax reform.”

Specifically, the company is now looking for full-year profits of between $2.03 and $2.05 per share, up from a prior forecast of between $1.95 and $2.02 per share. The raised outlook is being attributed to lower tax rates.

Still, in an environment where inflation on all fronts is a stark reality and where consumers are offered an increasing number of easy-to-get options, flat to slightly lower sales and only slightly lower operating margins are a relative victory.

In other words, CAG stock is arguably the best of a beleaguered bunch. If and when inflation pressure eases and exchange rates turn favorable again, Conagra’s going to be a lean, mean food machine. It might be worth waiting it out, collecting a decent dividend yield of 2.4% in the meantime.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/conagra-stock-is-the-best-of-a-beleaguered-bunch/.

©2024 InvestorPlace Media, LLC