Three months ago, in the wake of its fiscal Q2 report, food company Conagra Brands (NYSE:CAG) could do nothing right. CAG stock was in a freefall, mostly on concerns that a costly acquisition of Pinnacle Foods may have made a bad problem worse.
What a difference three months makes.
Since posting its fiscal third-quarter numbers on Thursday morning of last week, Conagra stock is up 15%. Additionally, investors are starting to see a real benefit from the pairing.
Much work involving integration remains. However, last week’s report puts Conagra on a clear path to recovery through adopting a strategy that its rivals utilized.
Conagra Earnings
For the three-month stretch ending in February, Conagra turned $2.7 billion in revenue into operating earnings of 51 cents per share. The top line fell short of the $2.75 billion analysts were calling for. However, the bottom line was better than the expected 49 cents per share of CAG stock.
Sales grew 35.7% year-over-year, mostly driven by the Pinnacle acquisition. Organic sales, which strip out the benefit of the Pinnacle deal, were up 2%. This was due to a combination of higher prices and volume growth.
CEO Sean Connolly commented on the third-quarter numbers, stating:
The integration of Pinnacle Foods, and the reinvigoration of its innovation pipeline, remain squarely on-track. We are aggressively applying our proven ‘Conagra Way’ to address the executional challenges in the Birds Eye, Duncan Hines and Wish-Bone businesses. While it will take some time to return these Pinnacle businesses to growth, we are confident that we have identified the issues and have the right action plans in place to improve the performance of these terrific brands.
Snacks and grocery revenue was up 2.9%, while sales of refrigerated and frozen foods grew 2.4% on an organic basis. International sales fell 11.4%. Food costs and transportation costs were up, but higher prices offset them. At the same time, as Conagra began integrating Pinnacle into its corporate umbrella, selling and administration expenses fell 5%.
Conagra Stock Requires Some Perspective
Conagra Foods hasn’t escaped the headwind that’s proven problematic for the entire industry. Shares of Kraft Heinz (NASDAQ:KHC) and Campbell Soup Company (NYSE:CPB) have fallen significantly since mid-2017, along with CAG stock. As Credit Suisse analyst Robert Moskow described the struggle earlier this year, major food brands are “slowly shrinking in relevance.” Consumers’ preferences changed, opting instead for small, niche brands.
Moskow also notes the impact of Amazon.com (NASDAQ:AMZN). The e-commerce firm makes it easier for those brands and consumers to connect with one another.
One preferred solution has been acquisitions, to increase scale and lower relative spending by buying smaller companies and combining operations. Kraft Heinz completed its acquisition of Primal Kitchen earlier this year. Campbell Soup acquired Snyder’s-Lance in March of last year.
Conagra Foods sealed a deal to buy Pinnacle Foods in October of 2018. However, the union got off to a lackluster start. Though the deal only impacted a small portion of its fiscal Q2 results, CAG stock fell significantly on concerns the acquisition was ill-advised, and the integration would be tough.
Investors believe things have changed now, however, given the double-digit gain CAG stock has logged since posting last quarter’s numbers.
Connolly led them in that direction, saying in the earnings release:
The integration of Pinnacle Foods, and the reinvigoration of its innovation pipeline, remain squarely on-track. We are aggressively applying our proven ‘Conagra Way’ to address the executional challenges in the Birds Eye, Duncan Hines and Wish-Bone businesses. While it will take some time to return these Pinnacle businesses to growth, we are confident that we have identified the issues and have the right action plans in place to improve the performance of these terrific brands.
Looking Ahead for CAG Stock
The third quarter numbers largely affirm the Pinnacle deal is panning out, increasing sales and decreasing costs. Conagra reported the pairing created $12 million of the eventual $215 million in synergies it expects last quarter.
The integration work isn’t done yet, though. Connelly said within the third quarter earnings release that Conagra has “identified the issues and have the right action plans in place to improve the performance” of the Pinnacle acquisition.
More details about the deal are going to be offered during an investor conference slated for April 10th. That meeting will detail some innovations as well as potential cost-cuts. As such, it has the ability to move an increasingly volatile CAG stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
