Concerns About Pinnacle Integration Ding Conagra

While narrow-moat

Conagra's outlook now calls for Pinnacle to be dilutive by 40 basis points to consolidated fiscal 2019 gross margin, with Pinnacle's adjusted gross margin expected to hover around 27%, below the 29% in its last fiscal year and our above 30% estimate. We plan to trim our $37.50 by a high single-digit percentage as we temper our near-term sales and profitability forecast for Pinnacle, although we aren't anticipating any material changes to our outlook for Conagra's legacy business. Over the long run, we still view low-single-digit sales growth and midteens average operating margin (on a consolidated basis) to be feasible, as management strengthens innovation and execution within Pinnacle's brand set, though we wouldn't be surprised to see further erosion over the next few quarters as these efforts may take time to yield improvement. Shares pulled back by a high-teens percentage on the announcement and look undervalued even relative to our expected revisions.

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