Company Reports

Conagra’s business has evolved over the years, from a conglomerate, reinforced by its 2012 acquisition of Ralcorp that bolstered its private-label exposure (later divested at half the purchase price), to its present focus on brands and driving growth through increased value (rather than just boosting volume). However, food is competitive, and we don’t think it has a portfolio of leading brands and entrenched retailer relationships to warrant pricing power, a handicap relative to branded peers. In addition, it spends notably less in product development and marketing, claiming more efficient spending closes the gap. But we remain skeptical and don’t believe it will capitalize on consumer trends more effectively than competitors. A subscale portfolio lacking strong brands combined with continued underspending is likely to leave it an industry laggard, in our view.

Over recent quarters, the challenging macroeconomic environment has weighed on no-moat Conagra’s results. However, its fiscal 2024 third-quarter earnings release showed some early signs of headwinds easing. Organic sales declined 2% over the prior year and adjusted operating profit margin recovered to 16.4%, an improvement from fiscal second quarter’s 3.4% decline and margin of 15.9%, respectively.

Conagra’s business has evolved over the years, from a conglomerate, reinforced by its 2012 acquisition of Ralcorp that bolstered its private-label exposure (later divested at half the purchase price), to its present focus on brands and driving growth through increased value (rather than just boosting volume). However, food is competitive, and we don’t think it has a portfolio of leading brands and entrenched retailer relationships to warrant pricing power, a handicap relative to branded peers. In addition, it spends notably less in product development and marketing, claiming more efficient spending closes the gap. But we remain skeptical and don’t believe it will capitalize on consumer trends more effectively than competitors. A subscale portfolio lacking strong brands combined with continued underspending is likely to leave it an industry laggard, in our view.

Macroeconomic challenges continued to weigh on results in no-moat Conagra’s second fiscal quarter as a value-conscious consumer drove organic net sales down 3.4%, worse than the prior quarter’s 0.3% decline. Although we expect consumers to normalize their buying behavior as inflation cools, we also expect both product investment and merchandising expenses to rise as competition intensifies. Given this outlook and the results, we expect to cut our fair value estimate of $33 per share by a dollar or two. Shares remain slightly undervalued, but we see more attractive risk-adjusted upside among other food names, including best-idea Tyson Foods.

After updating our forecasts and revising our long-term views, we are cutting our fair value estimate for Conagra to $33 per share from $46.50, mostly from a roughly 150-basis-point reduction in our midcycle operating margin forecast as we expect competition to erode recent expansion. Even at our reduced fair value estimate, shares look undervalued as we think the market is overweighting the near-term volume challenges Conagra is facing. As the rapid price increases of the recent past slow, we think consumers will return to more normalized buying patterns.

Conagra’s business has evolved over the years, from a conglomerate, reinforced by its 2012 acquisition of Ralcorp that bolstered its private-label exposure (later divested at half the purchase price), to its present focus on brands and driving growth through increased value (rather than just boosting volume). However, food is competitive, and we don’t think it has a portfolio of leading brands and entrenched retailer relationships to warrant pricing power, a handicap relative to branded peers. In addition, it spends notably less in product development and marketing, claiming more efficient spending closes the gap. But we remain skeptical and don’t believe it will capitalize on consumer trends more effectively than competitors. A subscale portfolio lacking strong brands combined with continued underspending is likely to leave it an industry laggard, in our view.

When CEO Sean Connolly was brought in to turn around a struggling Conagra in 2015, he implemented a new brand-building strategy referred to as the Conagra Way. The process calls for using data to identify product attributes that are driving growth and designing products to reflect those traits. The strategy also increases the productivity of marketing investments by shifting spend to the more efficient digital channel and to higher potential brands. In addition, the firm has significantly reshaped its portfolio inorganically, shedding nonbranded or noncore businesses and acquiring brands that enhance the firm’s growth and/or profit margins. As a result, in recent years, sales have inflected from declines to growth and from market share losses to modest gains. We think the pandemic, which resulted in four and a half years' worth of incremental new buyers and saved the firm hundreds of millions of dollars in customer acquisition costs, will accelerate the benefits Conagra is reaping from these efforts, as many new consumers have been exposed to its new fare. Once the food retail market normalizes postpandemic, we think Conagra can realize 2% annual organic sales growth. In addition, Conagra has identified over $1 billion in supply chain savings to be realized by fiscal 2025, which should result in operating margins that reach 18% over the long term, up from the 15.4% metric realized in fiscal 2019, before the pandemic and its aftershocks disrupted the market.

No-moat Conagra reported a slow start to fiscal 2024, with first-quarter organic net sales down 0.3% over the prior year. Still, the company had been guiding to a much slower top line for 2024, so the results were not entirely surprising. However, we are likely to reduce our fair value estimate of $45.50 per share, as demand recovery might take longer than we previously thought.

Conagra closed its (May-ended) fiscal 2023 book with solid results—organic net sales were in line with our $3 billion estimate and adjusted EPS of $0.62 outpaced our $0.55 forecast. However, a bland fiscal 2024 outlook of 1% organic net sales growth and $2.70-$2.75 in adjusted EPS (we had forecast 2.1% and $2.70, respectively) on softer demand expectations should leave our $46.50 fair value estimate largely unchanged. Shares still appear attractive, trading 30% below our valuation. We remain optimistic about Conagra’s long-term margin improvement prospects, with our forecast calling for 18% adjusted operating margins long-term (from 14.6% in fiscal 2023), supported by a normalized cost environment and ongoing supply chain initiatives.

When CEO Sean Connolly was brought in to turn around a struggling Conagra in 2015, he implemented a new brand building strategy referred to as the Conagra Way. The process calls for using data to identify product attributes that are driving growth and designing products to reflect those traits. The strategy also increases the productivity of marketing investments by shifting spend to the more efficient digital channel and to higher potential brands. In addition, the firm has significantly reshaped its portfolio inorganically, shedding non-branded or noncore businesses and acquiring brands that enhance the firm’s growth and/or profit margins. As a result, in recent years, sales have inflected from declines to growth, and from market share losses to modest gains. We think the pandemic, which resulted in four and a half years' worth of incremental new buyers and saved the firm hundreds of millions of dollars in customer acquisition costs, will accelerate the benefits Conagra is reaping from these efforts, as many new consumers have been exposed to its new fare. Once the food retail market normalizes post-pandemic, we think Conagra can realize 2% annual organic sales growth. In addition, Conagra has identified over $1 billion in supply chain savings to be realized by fiscal 2025, which should result in operating margins that reach 18% over the long term, up from the 15.4% metric realized in fiscal 2019, before the pandemic and its aftershocks disrupted the market.

Our $44.50 per share valuation of no-moat Conagra should rise by a low- to mid-single-digit percentage after the company announced solid third-quarter (period ended Feb. 26) results, including 6% organic net sales growth and a little over 320 basis points of adjusted operating margin improvement (to 16.9%). The strong recent performance does not materially alter our long-term forecast (2% revenue growth, 17% average operating margins over the next decade). We believe the shares are somewhat attractive as market sentiment likely underestimates Conagra’s long-term margin prospects.

When CEO Sean Connolly was brought in to turn around a struggling Conagra in 2015, he implemented a new brand building strategy referred to as the Conagra Way. The process calls for using data to identify product attributes that are driving growth and designing products to reflect those traits. The strategy also increases the productivity of marketing investments by shifting spend to the more efficient digital channel and to higher potential brands. In addition, the firm has significantly reshaped its portfolio inorganically, shedding non-branded or noncore businesses and acquiring brands that enhance the firm’s growth and/or profit margins. As a result, in recent years, sales have inflected from declines to growth, and from market share losses to modest gains. We think the pandemic, which resulted in four and a half years of incremental new buyers and saved the firm hundreds of millions of dollars in customer acquisition costs, will accelerate the benefits Conagra is reaping from these efforts, as many new consumers have been exposed to its new fare. Once the food retail market normalizes post-pandemic, we think Conagra can realize 2% annual organic sales growth. In addition, Conagra has identified over $1 billion in supply chain savings to be realized by fiscal 2025, which should result in operating margins that reach 18% over the long term, up from the 15.4% metric realized in fiscal 2019, before the pandemic and its aftershocks disrupted the market.

No-moat Conagra Brands posted stellar (November-ended) fiscal 2023 second-quarter results, with its organic net sales advancing 8.6% on a 17% contribution from price/mix, which was partially offset by an 8.4% downdraft in volume. From our vantage point, Conagra’s ability to maintain lower elasticity levels (less erosion to volume from price hikes) relative to its historical norms highlights successful portfolio reshaping efforts undertaken by its management to shift its product mix toward more on-trend higher-growth, and less-commoditized fare. In addition, Conagra’s continued share gaining momentum in its strategic domains strikes us as encouraging, with its snack and frozen categories (64% of U.S. retail sales) gaining 70 basis points in the quarter. Nonetheless, we hold our belief that Conagra’s relative underinvestment (3% of sales spending on marketing and R&D versus 6% for peers) may erode its brand strength and would likely lead to modest market share losses longer term, underpinning our no-moat rating.

When CEO Sean Connolly was brought in to turn around a struggling Conagra in 2015, he implemented a new brand building strategy referred to as the Conagra Way. The process calls for using data to identify product attributes that are driving growth and designing products to reflect those traits. The strategy also increases the productivity of marketing investments by shifting spend to the more efficient digital channel and to higher potential brands. In addition, the firm has significantly reshaped its portfolio inorganically, shedding non-branded or noncore businesses and acquiring brands that enhance the firm’s growth and/or profit margins. As a result, in recent years, sales have inflected from declines to growth, and from market share losses to modest gains. We think the pandemic, which resulted in four and a half years of incremental new buyers and saved the firm hundreds of millions of dollars in customer acquisition costs, will accelerate the benefits Conagra is reaping from these efforts, as many new consumers have been exposed to its new fare. Once the food retail market normalizes post-pandemic, we think Conagra can realize 2% annual organic sales growth. In addition, Conagra has identified over $1 billion in supply chain savings to be realized by fiscal 2025, which should result in operating margins that exceed 18% over the long term, up from the 15.4% metric realized in fiscal 2019, before the pandemic and its aftershocks disrupted the market.

Our primary takeaway from Conagra’s fiscal first-quarter results is that its brands are performing better than we expected in the face of consumer trade-down to private label. Although private brands have been gaining grocery market share since January, Conagra continues to gain share. The total company gained 10 basis points of share during the quarter, with its priority snack and frozen categories (63% of U.S. retail sales) gaining 70 basis points. We attribute these gains to the turnaround efforts employed under CEO Sean Connolly, including a reshaped portfolio to focus on differentiated, higher-growth categories, innovations based on data-driven consumer insights, and more effective marketing investments. While we applaud these actions and acknowledge that Conagra has several leading brands, its relative underinvestment (3% spent on marketing and R&D collectively compared with 6% for peers) lowers our conviction that it can maintain this brand strength over the long term, resulting in our no-moat rating.

When CEO Sean Connolly was brought in to turn around a struggling Conagra in 2015, he implemented a new brand building strategy referred to as the Conagra Way. The process calls for using data to identify product attributes that are driving growth and designing products to reflect those traits. The strategy also increases the productivity of marketing investments by shifting spend to the more efficient digital channel and to higher potential brands. In addition, the firm has significantly reshaped its portfolio inorganically, shedding non-branded or noncore businesses and acquiring brands that enhance the firm’s growth and/or profit margins. As a result, in recent years, sales have inflected from declines to growth, and from market share losses to modest gains. We think the pandemic, which resulted in four and a half years of incremental new buyers and saved the firm hundreds of millions of dollars in customer acquisition costs, will accelerate the benefits Conagra is reaping from these efforts, as many new consumers have been exposed to its new fare. Once the food retail market normalizes post-pandemic, we think Conagra can realize 2% annual organic sales growth. In addition, Conagra has identified over $1 billion in supply chain savings to be realized by fiscal 2025, which should result in operating margins that exceed 18% over the long term, up from the 15.4% metric realized in fiscal 2019, before the pandemic and its aftershocks disrupted the market.

At its July 27 investor day, no-moat Conagra shared its long-term algorithm of low-single-digit organic sales growth, mid- to high-teen operating margins, and mid- to high-single-digit EPS growth, largely in line with our forecast for 2% sales growth, 18% operating margins, and 6% EPS growth. We do not plan a material change to our $44 fair value estimate, leaving shares trading at a 25% discount.

In its fiscal fourth quarter of 2022, no-moat Conagra reported 7% organic sales growth, driven by a 13% increase in price/mix, partially offset by a 6% drop in volumes. This represents an increase in elasticities from the previous quarter (volumes pulled back more on price increases), in line with our expectations, since inflation has been driving consumers back toward private brands, after they traded up to national brands during the pandemic. But this may have spooked investors, with the stock down 7% on the day, which strikes us as an overreaction. While we think private brand market shares will return to pre-pandemic levels over the next year as consumers combat inflation, Conagra’s deep pipeline of innovations and its plans to increase marketing investments should allow the firm to achieve our long-term expectations of 2% annual sales growth and 18% operating margins. We do not expect a material revision to our $44 fair value estimate, leaving shares trading at a 25% discount.

When CEO Sean Connolly was brought in to turn around a struggling Conagra in 2015, he implemented a new brand building strategy referred to as the Conagra Way. The process calls for using data to identify product attributes that are driving growth and designing products to reflect those traits. The strategy also increases the productivity of marketing investments by shifting spend to the more efficient digital channel and to higher potential brands. In addition, the firm has significantly reshaped its portfolio inorganically, shedding non-branded or noncore businesses and acquiring brands that enhance the firm’s growth and/or profit margins. As a result, in recent years, sales have inflected from declines to growth, and from market share losses to modest gains. We think the pandemic, which resulted in four and a half years of incremental new buyers and saved the firm hundreds of millions of dollars in customer acquisition costs, will accelerate the benefits Conagra is reaping from these efforts, as many new consumers have been exposed to its new fare. Once the food retail market normalizes post-pandemic, we think Conagra can realize 2% annual organic sales growth. In addition, Conagra has identified over $700 million in supply chain efficiencies, which should result in operating margins that exceed 18% over the long term, up from fiscal 2021’s 17.5% metric.

Our high-level takeaway from no-moat Conagra’s fiscal 2022 third quarter is that despite a difficult environment, the firm is managing the variables under its control well. Specifically, Conagra has improved its innovation process to develop on-trend products more effectively, resulting in an 80-basis-point increase in its market share in the last two years. That said, factors outside of its control continue to cause headwinds. Inflation has continued to accelerate, resulting in the need for another round of price increases (on top of the 10% already employed), to be put in place in the first fiscal quarter. While elasticities were rather resilient through the third quarter (ended Feb. 27), as gasoline prices rose in March, consumers began migrating to private brands across grocery, which is likely to pressure Conagra’s volumes going forward. Although Conagra has sold several businesses with high private brand exposure, we estimate that 40% of its U.S. retail sales still stem from categories in which private label has a significant presence (down from 50%).